Time Series Analysis

Introduction
Averaging
Trend
Seasonality
Lecture Objectives
You should be able to :
1. Discuss the advantages and limitations of time
series forecasting.
2. Use averaging, trend, and seasonality models
appropriately.
3. Interpret the Bias, MAD, MAPE and Standard
Error to evaluate a forecast.
Basic Forecasting Process
 Look at the data (Graph)
 Forecast (choose one or more methods)
 Evaluate (examine errors)
Time Series Sales Data
Consider the following sales data for 10 time periods (quarters)

Period Sales XYZ Corp. Sales

1 60 80
2 67 60

$ Thousand
3 50 40

4 58 20

5 62 0
0 2 4 6 8 10 12
6 60
Quarter
7 55
8 62
9 71 What is a good forecast for Sales for
the next period?
10 65
Naive Forecast
    Naive Actual Sales and Forecast
Period Sales Forecast
80
1 60 N/A 70
2 67 60 60

$ Thousand
50
3 50 67
40 Sales
4 58 50 30
Forecast
5 62 58 20
10
6 60 62
0
7 55 60 1 2 3 4 5 6 7 8 9 10

8 62 55 Time Period

9
10
71
65
62
71
yˆ t  yt 1
11   65 How good is this forecast?
Evaluating the Forecast
 X Y Naive   Abs  Percent Squared
Period Sales Forecast Error Error Error Error Error = y  yˆ
1 60           Bias = Avg (Errors)
2 67 60 7 7 10.45% 49.0
3 50 67 -17 17 34.00% 289.0 MAD = Avg (Abs
4 58 50 8 8 13.79% 64.0 Errors)
5 62 58 4 4 6.45% 16.0 MAPE = Avg (Percent
6 60 62 -2 2 3.33% 4.0
Errors)
MSE = Avg (Squared
7 55 60 -5 5 9.09% 25.0
Errors)
8 62 55 7 7 11.29% 49.0
9 71 62 9 9 12.68% 81.0
10 65 71 -6 6 9.23% 36.0
11   65 0.56 7.22 12.26% 68.1
BIAS MAD MAPE MSE
Standard Error (Square Root of MSE) = 8.3
Moving Averages
   
Moving
Avg.   Abs.   Percent Squared
How does this
Period Sales Forecast Error Error Error Error
3-period
1 60 N/A        
moving
2 67 N/A        
average
forecast
3 50 N/A        
compare to
4 58 59.0 -1.0 1.0 1.72% 1.0
the Naive
5 62 58.3 3.7 3.7 5.91% 13.4
forecast?
6 60 56.7 3.3 3.3 5.56% 11.1
7 55 60.0 -5.0 5.0 9.09% 25.0
8 62 59.0 3.0 3.0 4.84% 9.0
9 71 59.0 12.0 12.0 16.90% 144.0
10 65 62.7 2.3 2.3 3.59% 5.4
11 66.0 2.62 4.33 6.80% 29.86
BIAS MAD MAPE MSE
Standard Error (Square Root of MSE) = 5.5
Simple Exponential Smoothing
alpha= 0.3
    Exponential     Percent Squared
Period Sales Smoothing Error Abs. Error Error Error
1 60 N/A        
2 67 60.0 7.0 7.0 10.45% 49.0
3 50 62.1 -12.1 12.1 24.20% 146.4
4 58 58.5 -0.5 0.5 0.81% 0.2
5 62 58.3 3.7 3.7 5.92% 13.5
6 60 59.4 0.6 0.6 0.95% 0.3
7 55 59.6 -4.6 4.6 8.37% 21.2
8 62 58.2 3.8 3.8 6.10% 14.3
9 71 59.4 11.6 11.6 16.40% 135.6
10 65 62.8 2.2 2.2 3.31% 4.6
63.5 1.29 5.11 8.50% 42.79
BIAS MAD MAPE MSE
Standard Error (Square Root of MSE) = 6.5
Interpretation
Bias – indicates the direction of the errors. On average, is
the forecasting technique underestimating or
overestimating? Bias can be corrected.

MAD – The average magnitude of error.

MAPE – The average percent error. Error as a percent of

the actual values of y.

MSE – Mean Squared Error.

SE – Square root of MSE. This is the standard deviation of
the error terms. Useful for constructing confidence
intervals.
Questions
1. Can Bias be greater than MAD?
2. If we know the Bias, can we figure out the
MAD value?
3. Will Bias is lower for one technique than
another, will MAD also be lower?

4. Answer the above questions for MSE and

MAD instead of Bias and MAD.
 Data with a Trend
Period Sales
1 60 XYZ Corp. Sales
2 88
300
3 50 Dollars 1000s
4 111 200
5 135 100
6 90
0
7 150
0 1 2 3 4 5 6 7 8 9 10 11
8 149
Time period (Months)
9 200
10 190
Fitting a Trendline

y = 15.279x + 38.267
XYZ Corp. Sales 2
R = 0.812
250
Dollars 1000s

200
150
100
50
0
0 1 2 3 4 5 6 7 8 9 10 11
Time period (Months)
Regression Output
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.901106096
R Square 0.811992197
Adjusted R Square 0.788491221
Standard Error 23.60928811
Observations 10

ANOVA
  df SS MS F Significance F
Regression 1 19258.9121 19258.9121 34.5514 0.0004
Residual 8 4459.1879 557.3985
Total 9 23718.1      

  Coefficients Standard Error t Stat P-value Lower 95%

Intercept 38.2667 16.1282 2.3727 0.0451 1.0749
Period 15.2788 2.5993 5.8780 0.0004 9.2848
Seasonality
Quarter Sales (Y)
1 25 XYZ Inc. Sales
2 28
3 35 150
4 50
100
$ Million
5 39
6 44
7 55 50
8 70
9 52 0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
10 60
11 77 Quarter
12 100
13 85
Is there a trend? Is there seasonality?
14 100
15 111
16 140
Deseasonalizing
Component Analysis for Sales (Y)
Multiplicative Model
Original Data Detrended Data
150
1.2

Detr. Data
100
Data

1.0

50
0.8

3 6 9 12 15 3 6 9 12 15
Index Index

Seasonally Adjusted Data Seas. A dj. and Detr. Data Seasonally Adj. and Detrended Data
150
10
Seas. A dj. Data

100
0

50

-10
3 6 9 12 15 3 6 9 12 15
Index Index
Trend and Seasonally Adjusted
Forecasts
Time Series Decomposition Plot for Sales (Y)
Multiplicative Model
Variable
140
A ctual
Fits
120 Trend

A ccuracy Measures
MA PE 8.3653
100
MA D 4.8125
Sales (Y)

MSD 31.6074
80

60

40

20

2 4 6 8 10 12 14 16
Index
Questions
 How many seasons can there be in data?
 How many seasonal cycles are needed to
determine if seasonality exists?
 What does a seasonal index of 1.2 mean?