3

Forecasting
Agenda

Why -

Who -

When

How

T S
C I
What -

Cross Sectional Data -

Time Series Data

T C S I
Trend : T
Seasonal : S
Cycle : C
Irregular : I (Random)

Qualitative Method
Quantitative Method
Qualitative
Sales Representative
Market Research / Survay
Delphi Technique
Etc.
Quantitative
Time Series Casual Model
Linear Regression
Nave Approach
Moving Average
Simple
Weighted Average
Econometric
Smoothing
Trend
Time Series
Seasonal Time Series
Trend Projection
Exponential Smoothing
Moving Average
Simple
t T K 1
t 1
Y Y
Y
K
+
+
+ . +
=
Moving Average
Weighted Average
( ) ( )
1
( )
( )
N
t i t i
t
t
t i
w y
Y
w

=

( 1) ( 1) ( 2) ( 2) ( 3) ( 3) ( ) ( )
( )
( 1) ( 2) ( 3) ( )
...
...
t t t t t t t N t N
t
t t t t N
w y w y w y w y
Y
w w w w


+ + + +
=
+ + + +
Y =
y =
t i = i
N =
W =

Exponential
Smoothing
{ }
( ) ( 1) ( 1) ( 1) t t t t Y Y y Y o = +
Y =
y =
t i = i
o = 0.00 1.00 0.1 0.3
Trend Projection
Least Square Method

2
2
( ) t
n t y t y
b
n t
y b t
a
n
Y a bt

=
= +

Y =
y =
t =
n =
a = Y t = 0
b = slope
Seasonal Time
Series
t T K 1
t 1
Y Y
Y
K
+
+
+ . +
=
Seasonal Time
Series
Seasonal Time
Series
4/9/2005 11:38 AM
Department of Epidemiology and Health Statistics,Tongji Medical College http://statdtedm.6to23 (Dr. Chuanhua Yu)
18-20
The simple linear regression
model posits an exact linear
relationship between the expected
or average value of Y, the
dependent variable Y, and X, the
independent or predictor variable:

y|x
= o+| x
Actual observed values of Y
(y) differ from the expected value
(
y|x

) by an unexplained or
random error(c):

y =
y|x
+ c
= o+| x

+ c
Linear Regression
X
Y

y|x
=o + | x
x
}
}

| = Slope
1
y

{
Error: c

Regression Plot
0
{
o = Intercept
Forecasting Performance
Measures
) (
1
1
t
n
t
t
F D
n
MFE =

=

=
=
n
t
t t
F D
n
MAD
1
1

=
n
t
t
t t
D
F D
n
MAPE
1
100
2
1
) (
1
t
n
t
t
F D
n
MSE =

=
Mean Forecast Error (MFE or
Bias)
Want MFE to be as close to zero as possible -- minimum bias
A large positive (negative) MFE means that the forecast is
undershooting (overshooting) the actual observations
Note that zero MFE does not imply that forecasts are perfect (no
error) -- only that mean is on target
Also called forecast BIAS
) (
1
1
t
n
t
t
F D
n
MFE =

=
Mean Absolute Deviation
(MAD)
Measures absolute error
Positive and negative errors thus do not cancel
out (as with MFE)
Want MAD to be as small as possible
No way to know if MAD error is large or small in
relation to the actual data

=
=
n
t
t t
F D
n
MAD
1
1
Mean Absolute Percentage Error
(MAPE)
Same as MAD, except ...
Measures deviation as a percentage of
actual data

=
n
t
t
t t
D
F D
n
MAPE
1
100
Mean Squared Error (MSE)
Measures squared forecast error -- error
variance
Recognizes that large errors are
disproportionately more expensive than small
errors
But is not as easily interpreted as MAD, MAPE -
- not as intuitive
2
1
) (
1
t
n
t
t
F D
n
MSE =

=
The End