3.0 Business Forecasting

BUSINESS
FORECASTING
Reference Material
BUSINESS FORECASTING
Time Series:
A collection of observations or data made sequentially in time.
A dataset consisting of observations arranged in chronological order
Forecast:
An estimate of the future value of some variable
Example:
The number of 2 wheeler sales in Bangalore during next month
The average volume of an airline passengers in the next quarter
Reference Material
Time Series Plot:
Month
1
2
3
4
5
6
7
8
9
10
The graphical representation of time series data by

taking time on x axis & data on y axis
Example
The demand for a commodity E15 for last 20
months is given below. Draw the time series plot
Time Series Plot:
Example
Time series plot of the demand for a commodity
E15
Demand
139
137
174
142
141
162
180
164
171
206
Month
11
12
13
14
15
16
17
18
19
20
Demand
193
207
218
229
225
204
227
223
242
239
Time Series Plot

300
Demand
250
200
150
100
50
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Month
Reference Material
Trend:
A long term increase or decrease in the data

Example: The data on Yearly average of Indian GDP during 1993 to 2005.
Time Series Plot
190.00
170.00
150.00
130.00
110.00
90.00
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
GDP
94.43
100.00
107.25
115.13
124.16
130.11
138.57
146.97
153.40
162.28
168.73
183.09
195.74
GDP
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Year
Reference Material
Seasonal Pattern:
The time series data exhibiting rises and falls influenced by seasonal factors
Example: The data on monthly sales of a branded jackets
Month
Sales
Month
Sales
Month
Sales
Month
Sales
Jan-02
164
Jan-03
147
Jan-04
139
Jan-05
151
Feb-02
148
Feb-03
133
Feb-04
143
Feb-05
134
Mar-02
152
Mar-03
163
Mar-04
150
Mar-05
164
Apr-02
144
Apr-03
150
Apr-04
154
Apr-05
126
May-02
155
May-03
129
May-04
137
May-05
131
Jun-02
125
Jun-03
131
Jun-04
129
Jun-05
125
Jul-02
153
Jul-03
145
Jul-04
128
Jul-05
127
Aug-02
146
Aug-03
137
Aug-04
140
Aug-05
143
Sep-02
138
Sep-03
138
Sep-04
143
Sep-05
143
Oct-02
190
Oct-03
168
Oct-04
151
Oct-05
160
Nov-02
192
Nov-03
176
Nov-04
177
Nov-05
190
Dec-02
192
Dec-03
188
Dec-04
184
Dec-05
182
Reference Material
Seasonal Pattern:
The time series data exhibiting rises and falls influenced by seasonal factors
Time Series Plot
190
150
130
Oct-05
Jul-05
Apr-05
Jan-05
Oct-04
Jul-04
Apr-04
Jan-04
Oct-03
Jul-03
Apr-03
Jan-03
Oct-02
Jul-02
90
Apr-02
110
Jan-02
Sales
170
Month
Reference Material
Cyclic Pattern:
The time series data exhibiting rises and falls that are not of a fixed period
Examples: The sales of products such as automobiles, steel, etc. These are due to
economic fluctuations
The time series data may include a
combination of trend, seasonal,
cyclic patterns
Example: The data on monthly sales of
an Operating System is given
below:
Month
Sales
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
742
697
776
898
1030
1107
1165
1216
1208
1131
971
783
741
700
774
932
1099
1223
1290
1349
Month
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
Sales
Month
Sales
1341
41
1274
1296
42
1422
1066
43
1486
901
44
1555
896
45
1604
793
46
1600
885
47
1403
1055
48
1209
1204
49
1030
1326
50
1032
1303
51
1126
1436
52
1285
1473
53
1468
1453
54
1637
1170
55
1611
1023
56
1608
951
57
1528
861
58
1420
938
59
1119
1109
60
1013
Reference Material
Example: The data on monthly sales of an OS is given below:
58
55
52
49
46
43
40
37
34
31
28
25
22
19
16
13
10
1800
1600
1400
1200
1000
800
600
400
200
0
Operating System
Time Series Plot
Month
Reference Material
Accuracy Measure
Mean Absolute Deviation: MAD
Mean Square Deviation: MSD
Mean Absolute Percentage Error: MAPE
Reference Material
Example: The data on Yearly average of Indian GDP during 1993 to 2005. The
predicted values using a suitable forecasting method is also given.Check
the forecast accuracy using MAD, MSD & MAPE?
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
GDP
94.43
100.00
107.25
115.13
124.16
130.11
138.57
146.97
153.40
162.28
168.73
183.09
195.74
Predicted
91
99.165
107.329
115.494
123.659
131.824
139.989
148.154
156.319
164.484
172.649
180.814
188.979
Reference Material
Step 1: Calculate Error
Error = Actual - Predicted
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
GDP
94.43
100.00
107.25
115.13
124.16
130.11
138.57
146.97
153.40
162.28
168.73
183.09
195.74
Predicted
91
99.165
107.329
115.494
123.659
131.824
139.989
148.154
156.319
164.484
172.649
180.814
188.979
Error
3.43
0.83
-0.07
-0.36
0.50
-1.72
-1.41
-1.18
-2.92
-2.21
-3.92
2.27
6.76
Reference Material

Step 2: Calculate absolute Error
Absolute Error = absolute (Actual Predicted)
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
GDP
94.43
100.00
107.25
115.13
124.16
130.11
138.57
146.97
153.40
162.28
168.73
183.09
195.74
Predicted
91
99.165
107.329
115.494
123.659
131.824
139.989
148.154
156.319
164.484
172.649
180.814
188.979
Error
3.43
0.83
-0.07
-0.36
0.50
-1.72
-1.41
-1.18
-2.92
-2.21
-3.92
2.27
6.76
Absolute (Error)
3.42589
0.83500
0.07407
0.36394
0.49653
1.71579
1.41423
1.18090
2.91788
2.20677
3.91918
2.27388
6.76142
Reference Material

Step 3: Calculate MAD
MAD = Average of Absolute Error
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
GDP
94.43
100.00
107.25
115.13
124.16
130.11
138.57
146.97
153.40
162.28
168.73
183.09
195.74
Predicted
91
99.165
107.329
115.494
123.659
131.824
139.989
148.154
156.319
164.484
172.649
180.814
188.979
Error
3.43
0.83
-0.07
-0.36
0.50
-1.72
-1.41
-1.18
-2.92
-2.21
-3.92
2.27
6.76
Absolute (Error)
3.42589
0.83500
0.07407
0.36394
0.49653
1.71579
1.41423
1.18090
2.91788
2.20677
3.91918
2.27388
6.76142
MAD = 2.12
Reference Material

Step 1: Calculate Error
Error = Actual - Predicted
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
GDP
94.43
100.00
107.25
115.13
124.16
130.11
138.57
146.97
153.40
162.28
168.73
183.09
195.74
Predicted
91
99.165
107.329
115.494
123.659
131.824
139.989
148.154
156.319
164.484
172.649
180.814
188.979
Error
3.43
0.83
-0.07
-0.36
0.50
-1.72
-1.41
-1.18
-2.92
-2.21
-3.92
2.27
6.76
Reference Material

Step 2: Square Errors
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
GDP
94.43
100.00
107.25
115.13
124.16
130.11
138.57
146.97
153.40
162.28
168.73
183.09
195.74
Predicted
91
99.165
107.329
115.494
123.659
131.824
139.989
148.154
156.319
164.484
172.649
180.814
188.979
Error
3.43
0.83
-0.07
-0.36
0.50
-1.72
-1.41
-1.18
-2.92
-2.21
-3.92
2.27
6.76
Error Square
11.73675
0.69722
0.00549
0.13245
0.24654
2.94393
2.00006
1.39452
8.51401
4.86985
15.35998
5.17053
45.71683
Reference Material

Step 3: Calculate MSD
MSD = Average of Squared Error
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
GDP
94.43
100.00
107.25
115.13
124.16
130.11
138.57
146.97
153.40
162.28
168.73
183.09
195.74
Predicted
91
99.165
107.329
115.494
123.659
131.824
139.989
148.154
156.319
164.484
172.649
180.814
188.979
Error
3.43
0.83
-0.07
-0.36
0.50
-1.72
-1.41
-1.18
-2.92
-2.21
-3.92
2.27
6.76
Error Square
11.73675
0.69722
0.00549
0.13245
0.24654
2.94393
2.00006
1.39452
8.51401
4.86985
15.35998
5.17053
45.71683
MSD = 7.60
Reference Material
Mean Absolute Percentage Error : MAPE

Step 1: Calculate Absolute Errors
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
GDP
94.43
100.00
107.25
115.13
124.16
130.11
138.57
146.97
153.40
162.28
168.73
183.09
195.74
Predicted Abs(Error)
91
3.43
99.165
0.83
107.329
0.07
115.494
0.36
123.659
0.50
131.824
1.72
139.989
1.41
148.154
1.18
156.319
2.92
164.484
2.21
172.649
3.92
180.814
2.27
188.979
6.76
Reference Material
Step 2: Calculate relative or percentage error

% Error = (absolute Error / Actual) x 100
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
GDP
94.43
100.00
107.25
115.13
124.16
130.11
138.57
146.97
153.40
162.28
168.73
183.09
195.74
Predicted
91
99.165
107.329
115.494
123.659
131.824
139.989
148.154
156.319
164.484
172.649
180.814
188.979
Error
3.43
0.83
0.07
0.36
0.50
1.72
1.41
1.18
2.92
2.21
3.92
2.27
6.76
% Error
3.62813
0.83500
0.06906
0.31611
0.39992
1.31874
1.02056
0.80348
1.90212
1.35988
2.32276
1.24196
3.45428
Reference Material

Step 3: Calculate MAPE
MAPE = Average of % Error
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
GDP
94.43
100.00
107.25
115.13
124.16
130.11
138.57
146.97
153.40
162.28
168.73
183.09
195.74
Predicted
91
99.165
107.329
115.494
123.659
131.824
139.989
148.154
156.319
164.484
172.649
180.814
188.979
Error
3.43
0.83
0.07
0.36
0.50
1.72
1.41
1.18
2.92
2.21
3.92
2.27
6.76
% Error
3.62813
0.83500
0.06906
0.31611
0.39992
1.31874
1.02056
0.80348
1.90212
1.35988
2.32276
1.24196
3.45428
MAPE = 1.437
Reference Material
Exercise:The data on shipments over a periods of time in the chronological

order is given below. The forecasts obtained using two different
methods are also given below. Identify which forecasting method is
more accurate using MAD, MSD & MAPE?
Shipments Forecast 1 Forecast 2
115
70.333
89.167
132
94.667
112.212
141
115.667
135.258
154
129.333
158.303
171
142.333
181.348
180
155.333
204.394
204
168.333
227.439
228
185
250.485
247
204
273.53
291
226.333
296.576
337
255.333
319.621
391
291.667
342.667
Reference Material
Prediction Interval
Prediction interval : Predicted value z MSD
where z = width of prediction interval
Prediction Interval
90%
1.645
95%
1.960
99%
2.576
Reference Material
Prediction Interval
predicted values using a suitable forecasting method is also
given.Calculate 95% prediction interval
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
GDP
94.43
100.00
107.25
115.13
124.16
130.11
138.57
146.97
153.40
162.28
168.73
183.09
195.74
Predicted
91
99.165
107.329
115.494
123.659
131.824
139.989
148.154
156.319
164.484
172.649
180.814
188.979
Reference Material
Prediction Interval
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
GDP
94.43
100.00
107.25
115.13
124.16
130.11
138.57
146.97
153.40
162.28
168.73
183.09
195.74
Predicted
91
99.165
107.329
115.494
123.659
131.824
139.989
148.154
156.319
164.484
172.649
180.814
188.979
Error
3.43
0.83
0.07
0.36
0.50
1.72
1.41
1.18
2.92
2.21
3.92
2.27
6.76
Square Error
11.73675
0.69722
0.00549
0.13245
0.24654
2.94393
2.00006
1.39452
8.51401
4.86985
15.35998
5.17053
45.71683
MSD
7.60
MSD
2.76
1.96
Prediction Interval
5.40
Reference Material
Prediction Interval
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
GDP
94.43
100.00
107.25
115.13
124.16
130.11
138.57
146.97
153.40
162.28
168.73
183.09
195.74
Prediction Interval
Predicted Lower Limit
91
85.597
99.165
93.762
107.329
101.926
115.494
110.091
123.659
118.256
131.824
126.421
139.989
134.586
148.154
142.751
156.319
150.916
164.484
159.081
172.649
167.246
180.814
175.411
188.979
183.576
Upper Limit
96.403
104.568
112.732
120.897
129.062
137.227
145.392
153.557
161.722
169.887
178.052
186.217
194.382
MSD
7.60
MSD
2.76
1.96
Prediction Interval
5.40
Reference Material
Prediction Interval
Example:The data on shipments over a periods of time in the chronological
order is given below with the forecasted values. Provide 95%
prediction interval?
Shipments Forecast
115
89.167
132
112.212
141
135.258
154
158.303
171
181.348
180
204.394
204
227.439
228
250.485
247
273.53
291
296.576
337
319.621
391
342.667
Reference Material
Moving Average Method

Moving Average: The average of successive smaller set of data
order is given below. Calculate the forecasts using moving average of
length 3?
Period
1
2
3
4
5
6
7
8
9
10
11
12
Shipments
115
132
141
154
171
180
204
228
247
291
337
391
Reference Material

Moving Average: The average of successive smaller set of data
order is given below. Calculate the forecasts using moving average of
length 3?
Period
1
2
3
4
5
6
7
8
9
10
11
12
13
Shipments
115
132
141
154
171
180
204
228
247
291
337
391
Moving Average (3) Forecast
(115+132+141)/3
(132+141+154)/3
(247+291+337)/3
(291+337+391)/3
129.33
142.33
155.33
168.33
185.00
204.00
226.33
255.33
291.67
339.67
MAD
49.48
MSD
3080.79
MAPE
19.12
Reference Material
Step 1: Take Moving average Length k = 2

Step 2: Calculate moving average of length k
Step 3: Calculate Forecast Accuracy Measures (MAD, MSD or MAPE)
Step 4: Repeat step 2 & 3 with k = 3, 4 - - - , 10 or 12
Step 5: Identify the optimum k . The k with minimum MAD or MSD.
Step 6: Calculate the forecasts as moving average of length optimum k
Step 7: Calculate prediction intervals, if required
Reference Material
Exercise 1:The data on yearly income before taxes of a PC manufacturer is

given below:. Forecast the income in the coming year using moving
average method? Calculate the prediction interval?
Year
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Income (Million $)
46.163
46.998
47.816
48.311
48.758
49.164
49.548
48.915
50.315
50.768
Reference Material
Trend line Method
Step 1: Draw Time Series Plot of the data

Step 2: If the plot shows an increasing or decreasing trend, fit a trend line and
get the equation
Step 3: Estimate the forecast values using trend line equation
Reference Material
Trend line Method
Example:The data on Yearly average of Indian GDP during 1993 to 2005 is given
below. Develop a forecasting model for predicting GDP. Predict the GDP for
2006 & 2007
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
GDP
94.43
100.00
107.25
115.13
124.16
130.11
138.57
146.97
153.40
162.28
168.73
183.09
195.74
Reference Material
Trend line Method
below. Develop a forecasting model for predicting GDP. Predict the GDP for
2006 & 2007
Time Series Plot
190.00
150.00
130.00
110.00
90.00
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
GDP
170.00
Year
Reference Material
Trend line Method
below. Develop a forecasting model for predicting GDP.
Trend Analysis Plot for GDP
Linear Trend Model
Yt = 82.8346 + 8.16495*t
200
Variable
Actual
Fits
180
Accuracy
MAPE
MAD
MSD
GDP
160
Measures
1.43774
2.12365
7.60320
140
120
100
1
7
8
Index
10
11
12
13
Reference Material
SINGLE EXPONENTIAL SMOOTHING

Moving Average Method: Issues
Give equal weightage to all the values
Single Exponential Smoothing:

Give more weight to recent values compared to the old values
Single Exponential Smoothing: Methodology
Let y1,y2, - - - yt be the values, then
yt+1 estimate = St+1 = yt + (1- ) St
where 0 1 and S1 = y1
Reference Material

Example: The data on ad revenue from an advertising agency for the last 12 months is
given below. Forecast the ad revenue from the agency in the future month
using single exponential smoothing method with = 0.13?
Month
1
2
3
4
5
6
Amount
9
8
9
12
9
12
Month
7
8
9
10
11
12
Amount
11
7
13
9
11
10
Reference Material

Example: Forecasts using single exponential smoothing method with = 0.13?
Month
1
2
3
4
5
6
7
8
9
10
11
12
Amount
9
8
9
12
9
12
11
7
13
9
11
10
Forecasts
9.00
8.87
8.89
9.29
9.25
9.61
9.79
9.43
9.89
9.78
9.94
Forecast of y2 = y1 = 9.00
Forecast of y3 = .y2 + (1- ) (y2 Forecast) = 0.13 x 8 + (1 0.13) x 9 = 8.87
Reference Material

Determination of
Step 1:
Choose = 0.1
Step 2:
Forecast Values
Step 3:
Calculate Errors
Step 4:
Calculate SSE and MSE
Step 5:
Repeat steps 1 to 4 for different values of
Step 6:
Choose the with minimum MSE
Reference Material

Example: The data on ad revenue from an advertising agency for the last 12 months is
given below. Forecast the ad revenue from the agency in the future month
using single exponential smoothing method with best value of ?
Month
1
2
3
4
5
6
Amount
9
8
9
12
9
12
Month
7
8
9
10
11
12
Amount
11
7
13
9
11
10
Reference Material

Single Exponential Smoothing: Issues
Single Exponential smoothing is not good when there is a trend
Example: For the following data, Forecast the values using single exponential smoothing
method with = 0.3?
Data
6.4
5.6
7.8
8.8
11
11.6
16.7
15.3
21.6
22.4
Reference Material

method with = 0.3?
Data
6.4
5.6
7.8
8.8
11
11.6
16.7
15.3
21.6
22.4
Forecast
6.4
6.16
6.65
7.30
8.41
9.37
11.57
12.69
15.36
Reference Material

method with = 0.3?
25
20
15
Data
Forecast
10
5
0
1
10
Solution: Double Exponential Smoothing

Reference Material
DOUBLE EXPONENTIAL SMOOTHING

Double Exponential Smoothing: Methodology
Let y1,y2, - - - yt be the values, then
yt+1 estimate = St = yt + (1- ) (St-1 + bt-1)
and bt = (St - St-1) + (1- ) bt-1
where 0 1, 0 1, S1 = y1 and b1 = y2 y1
Reference Material

Determination of and
Step 1:
Choose = 0.1, = 0.1
Step 2:
Forecast Values
Step 3:
Calculate Errors
Step 4:

Step 5:
Repeat steps 1 to 4 for different values of &
Step 6:
Choose the & with minimum MSE
Reference Material

Example: For the following data, estimate the best values of and to forecast the
values using Double Exponential Smoothing?
Data
6.4
5.6
7.8
8.8
11
11.6
16.7
15.3
21.6
22.4
Reference Material
MOVING AVERAGE (MA) PROCESS

Model:
yt estimate = constant + 1Z t-1 + 2Z t-2 + - - Where zt = yt yt estimate
Reference Material

Determination of order of MA Process:
Example: The data daily revenues is given below. Calculate the order of MA
process to forecast future revenues?
SL No
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Data
11.9
11.94
11.69
11.86
12.69
11.95
11.9
12.08
12.03
11.99
12.11
11.98
11.71
11.87
12.12
SL No
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
Data
15.28
9.33
12.54
12.07
12.08
12.26
12.03
12.04
11.93
12.02
12.27
12.07
11.77
12.16
12.26
SL No
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
Data
11.51
12.56
12.2
12.38
12.46
12.21
11.83
12.08
11.48
11.63
12.68
11.93
13.7
13.95
11.5
Reference Material

Step 1:
Total number of values N = 45
20 % of N = k = 0.2 x 45 = 9
Step 2:
Calculate auto correlation coefficients upto lag k
Reference Material

Auto Correlation Coefficient of Lag 1 = -0.31767

SL No.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
Yt
11.9
11.94
11.69
11.86
12.69
11.95
11.9
12.08
12.03
11.99
12.11
11.98
11.71
11.87
12.12
15.28
9.33
12.54
12.07
12.08
12.26
12.03
12.04
Yt-1
11.94
11.69
11.86
12.69
11.95
11.9
12.08
12.03
11.99
12.11
11.98
11.71
11.87
12.12
15.28
9.33
12.54
12.07
12.08
12.26
12.03
12.04
11.93
SL No.
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
Yt
11.93
12.02
12.27
12.07
11.77
12.16
12.26
11.51
12.56
12.2
12.38
12.46
12.21
11.83
12.08
11.48
11.63
12.68
11.93
13.7
13.95
11.5
Yt-1
12.02
12.27
12.07
11.77
12.16
12.26
11.51
12.56
12.2
12.38
12.46
12.21
11.83
12.08
11.48
11.63
12.68
11.93
13.7
13.95
11.5
Reference Material

Auto Correlation Coefficient of Lag upto k = 9
Lag
1
2
3
4
5
6
7
8
9
Auto Correlation Coefficients

-0.3177
0.0004
0.0164
-0.1139
-0.0143
-0.0071
-0.0109
0.0315
0.0152
Reference Material

Step 3: Calculate 95 % Upper & Lower Confidence limits for auto correlation
coefficients
Upper Limit = 2 / N = 2 / 45 = 0.2981
Lower limit = -2 N = -2 / 45 = -0.2981
Reference Material

Step 4: identify the auto correlation coefficients beyond the limits
Lag
1
2
3
4
5
6
7
8
9
Auto Correlation Coefficients Uppeer Limit Lower Limit

-0.3177
0.2981
-0.2981
0.0004
0.2981
-0.2981
0.0164
0.2981
-0.2981
-0.1139
0.2981
-0.2981
-0.0143
0.2981
-0.2981
-0.0071
0.2981
-0.2981
-0.0109
0.2981
-0.2981
0.0315
0.2981
-0.2981
0.0152
0.2981
-0.2981
Only auto correlation coefficient of Lag 1 is beyond the limits

The model will have only one MA term
Model: yt= constant + 1Z t-1
Where zt = yt yt estimate
Reference Material

Determination of Coefficients:
Step 1:
Choose between 0.1 and 0.1
Step 2:
Forecast Values
Step 3:
Calculate Errors
Step 4:

Step 5:
Step 6:
Reference Material
Indian Statistical Institute
AUTO REGRESSIVE (AR) PROCESS

yt estimate = constant + 1y t-1 + 2y t-2 + - - Determination of the order of AR Process
Example: The data daily impressions per page given below. Calculate the order of
AR process to forecast future revenues?
SL No.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Data
259
310
268
379
275
102
139
60
93
45
101
161
288
372
291
SL No.
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
Data
416
248
314
351
417
276
164
120
379
277
208
361
289
138
206
Reference Material

Determination of the order of AR Process
Example: The data daily impressions per page given below. Calculate the order of
AR process to forecast future revenues?
SL No.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Data
259
310
268
379
275
102
139
60
93
45
101
161
288
372
291
SL No.
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
Data
416
248
314
351
417
276
164
120
379
277
208
361
289
138
206
Reference Material

Step 1:
Total Number of Values N = 30
20 % of N = 6
Step 2:
Calculate auto correlation coefficients upto lag 6
Reference Material

Lag
1
2
3
4
5
6
Auto Correlation Coefficient

0.522
0.268
0.169
0.019
-0.197
-0.271
Step 3:
Calculate Partial auto correlation coefficients upto lag 6 using Yule

Walker equations
Reference Material

Yule Walker Equation
R = r
Where R =
r1
r2
---
r p-1
r1
r1
---
r p-2
r2
r1
---
r p-3
r p-1
r p-2
r p-3
---
= (1 2 - - - p)T
rT = ( r1, r2, - - -, rp)T , is the auto correlation coefficients
Hence Partial autocorrelation coefficients = R-1 r
Reference Material

= R-1 r
Where R =
0.522
0.268
0.169
0.019
-0.197
0.522
0.522
0.268
0.169
0.019
0.268
0.522
0.522
0.268
0.169
0.169
0.268
0.522
0.522
0.268
0.019
0.169
0.268
0.522
0.522
-0.197
0.019
0.169
0.268
0.522
Reference Material

= R-1 r
R-1 =
1.478227
-0.74363
0.011259
-0.14324
-0.0125
0.348349
r=
-0.74363 0.011259 -0.14324

-0.0125 0.348349
1.770225 -0.74635 0.11707
-0.1396
-0.0125
-0.74635 1.770205 -0.74865 0.11707 -0.14324
0.11707 -0.74865 1.770205 -0.74635 0.011259
-0.1396 0.11707 -0.74635 1.770225 -0.74363
-0.0125 -0.14324 0.011259 -0.74363 1.478227
0.522
0.268
0.169
0.019
-0.197
-0.271
Reference Material

= R-1 r
0.479115
-0.00634
0.106117
0.007863
-0.18514
-0.10022
Step 4:
Calculate 95 % Confidence Limits on partial auto correlation coefficients
Upper limit = 2 / N = 2 / 30 = 0.3651
Lower Limit = -2 / N = -0.3651

Reference Material

Partial Auto Correlation Coefficients with limits
Lag
1
2
3
4
5
6
Partial Auto Correlation Coefficients Lower Limit Upper Limit

0.479
-0.3651
0.3651
-0.006
-0.3651
0.3651
0.106
-0.3651
0.3651
0.008
-0.3651
0.3651
-0.185
-0.3651
0.3651
-0.100
-0.3651
0.3651
Only Partial Auto Correlation Coefficient is outside the limits.

Hence the model
yt estimate = constant + 1y t-1
Reference Material

Determination of Coefficients:
Step 1:
Choose between 1 and 1
Step 2:
Forecast Values
Step 3:
Calculate Errors
Step 4:

Step 5:
Step 6:
Reference Material
MIXED MODELS (ARMA)

yt estimate = constant + 1y t-1 + 1Z t-1 + 2y t-2 + 2Z t-2 + - - -
Where zt = yt yt estimate
Estimation of order of Process
Identify the order of MA (number of s ) using auto correlation coefficients
Identify the order of AR (number of s ) using Yule Walker equations
Estimation parameters
Estimate the best values of s and s by minimizing MSE
Reference Material
AUTO REGRESSIVE INTEGRATED MOVING AVERAGE PROCESS (ARIMA)
Step 1: Do differencing to make the data stationary
yt estimate = constant + 1y t-1 + 1Z t-1 + 2y t-2 + 2Z t-2 + - - Where zt = yt yt estimate

Estimation of order of Process
Identify the order of MA (number of s ) using auto correlation coefficients

Identify the order of AR (number of s ) using Yule Walker equations
Estimation parameters
Estimate the best values of s and s by minimizing MSE
Reference Material
AUTO REGRESSIVE INTEGRATED MOVING AVERAGE PROCESS (ARIMA)
Exercise: The data one daily impression is given below. Fit a suitable ARIMA
model to forecast the impressions for the future?
SL No
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Data
2719
2713
2612
3163
2300
1551
1823
1371
1548
1314
1568
1917
2697
3120
2595
SL No
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
Data
2021
2920
2726
2894
3227
2415
1887
1675
3081
2530
2069
2990
2658
2268
2049
Reference Material
Thanks for your time!

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BUSINESS

The graphical representation of time series data by

Time Series Plot

A long term increase or decrease in the data

Time Series Plot

Example: The data on monthly sales of an OS is given below:

Time Series Plot

Mean Absolute Deviation: MAD

Mean Absolute Deviation: MAD

Mean Square Deviation: MSD

Mean Square Deviation: MSD

Mean Square Deviation: MSD

Mean Absolute Percentage Error : MAPE

Mean Absolute Percentage Error : MAPE

Step 2: Calculate relative or percentage error

Mean Absolute Percentage Error : MAPE

Exercise:The data on shipments over a periods of time in the chronological

Moving Average Method

Moving Average Method

Moving Average (3) Forecast

Moving Average Method

Step 1: Take Moving average Length k = 2

Moving Average Method

Exercise 1:The data on yearly income before taxes of a PC manufacturer is

Trend line Method

Step 1: Draw Time Series Plot of the data

Trend line Method

Trend line Method

SINGLE EXPONENTIAL SMOOTHING

Single Exponential Smoothing:

SINGLE EXPONENTIAL SMOOTHING

SINGLE EXPONENTIAL SMOOTHING

SINGLE EXPONENTIAL SMOOTHING

SINGLE EXPONENTIAL SMOOTHING

SINGLE EXPONENTIAL SMOOTHING

SINGLE EXPONENTIAL SMOOTHING

SINGLE EXPONENTIAL SMOOTHING

Solution: Double Exponential Smoothing

DOUBLE EXPONENTIAL SMOOTHING

DOUBLE EXPONENTIAL SMOOTHING

Calculate SSE and MSE

DOUBLE EXPONENTIAL SMOOTHING

MOVING AVERAGE (MA) PROCESS

MOVING AVERAGE (MA) PROCESS

MOVING AVERAGE (MA) PROCESS

MOVING AVERAGE (MA) PROCESS

Auto Correlation Coefficient of Lag 1 = -0.31767

MOVING AVERAGE (MA) PROCESS

Auto Correlation Coefficient of Lag upto k = 9

Auto Correlation Coefficients

MOVING AVERAGE (MA) PROCESS

MOVING AVERAGE (MA) PROCESS

Auto Correlation Coefficients Uppeer Limit Lower Limit

Only auto correlation coefficient of Lag 1 is beyond the limits

MOVING AVERAGE (MA) PROCESS

Calculate SSE and MSE

Indian Statistical Institute

AUTO REGRESSIVE (AR) PROCESS

AUTO REGRESSIVE (AR) PROCESS

AUTO REGRESSIVE (AR) PROCESS

AUTO REGRESSIVE (AR) PROCESS

Auto Correlation Coefficient

Calculate Partial auto correlation coefficients upto lag 6 using Yule

AUTO REGRESSIVE (AR) PROCESS