Time Series Analysis - II

Arnab K Laha
Indian Institute of Management
Ahmedabad
Single Exponential Smoothing

This single exponential smoothing method is appropriate
for series that move randomly above and below a constant
mean with no trend nor seasonal patterns.

To correct past forecast mistakes

Next forecast = current forecast + “correction.”

“Correction” = a fraction of current forecast error.

Correction factor α is between 0 and 1.

α is called the smoothing constant.

Next forecast depends on value of correction factor α

and the current forecast error.
 Single Exponential Smoothing

or

It continually revises an estimate in

the light of more recent experiences
Autopilot
 Single Exponential Smoothing

α is the smoothing factor. The smaller is the α, the
smoother is the forecasted series. By repeated
substitution, we can rewrite the recursion as

t −1
Ŷt +1 = αYt + α(1 − α )Yt −1 + ... + α(1 − α ) Y1
t −1
s
= α ∑ (1 − α ) Yt −s
s =0
This shows why this method is called exponential smoothing –
the forecast is a weighted average of the past values of the series,
where the weights decline exponentially with time.
Single Exponential Smoothing:
Forecasting

The forecasts from single exponential smoothing
are constant for all future observations.

Let T = n + 1 where n is the number of observatio ns

ŶT +k = ŶT for k = 1,2,...
How to estimate α ???
•hunch
•MSE
INITIAL VALUE
How do we start?

the first estimate

of smoothed series = the first observation

just… average!
( use an average of first 5 or 6 observation)
Single Exponential Smoothing

Bowerman and O'Connell (1979) suggest that
values of around 0.01 to 0.30 work quite well.

You can also estimate α to minimize the sum of
squares of one-step forecast errors.
No. air passengers by week in Sweden

No.passengers at Swedish airports

No. passengers
13.6
13.4
13.2
(thousands)

13.0
12.8
12.6
12.4
12.2
1992 1996 2000 2004
Single exponential forecast of the number of air passengers
(α
α=0.2)

Ft +1 = Ft + α (Yt − Ft ) = αYt + (1− α )Ft

Smoothing Plot for No. passengers

Single Exponential Method
Variable
13.50
A ctual
Fits
Forecasts
95.0% PI
13.25
Smoothing Constant
No. passengers

A lpha 0.2

A ccuracy Measures
13.00
MAPE 0.688525
MAD 0.089820
MSD 0.014213

12.75

12.50

1 73 146 219 292 365 438 511 584 657 730

Index
Single exponential forecast of the number of air passengers
(α
α=0.05)

Ft +1 = Ft + α (Yt − Ft ) = αYt + (1 − α )Ft

Smoothing Plot for No. passengers

Single Exponential Method
Variable
13.50
Actual
Fits
Forecasts
95.0% PI
13.25
Smoothing C onstant
No. passengers

Alpha 0.05

Accuracy Measures
13.00
MAPE 0.773411
MAD 0.100988
MSD 0.017768

12.75

12.50

1 73 146 219 292 365 438 511 584 657 730

Index
 HOLT’S LINEAR METHOD

Holt’s two-parameter method,
1957

Smoothes the level and the slope, using

constants

Constants provide estimates of level and slope,

adapt over time as new observations become
available

Great deal of flexibility in selecting of the

rates at which the level and trend are changed.
Holt’s Linear Method

This method is appropriate for series with a linear
time trend and no seasonal variation.

Ideas behind smoothing with trend:

``De-trend'' time-series by separating base
from trend effects

Smooth base in usual manner using α

Smooth trend forecasts in usual manner using
β

Also called Double Exponential Smoothing
 Holt’s Method:

Smooth the base forecast Bt

B t = α Y t + (1 − α )( B t − 1 + T t − 1 )

Smooth the trend forecast Tt

Tt = β (B t − B t −1 ) + (1 − β )Tt −1

Forecast k periods into future Ft+k with base

and trend
Ft + k = B t + kTt
Holt’s Linear Method: How do we
start?

the first estimate of the smoothed

series = the first observation Ti = 0
Or,

use an average of first 5 or 6
observation
Choosing α and β

Grid of value of α and β

Select a combination: lowest MSE
Example: US Housing Starts

2200
US Housing Starts

2100

2000

1900

1800
Index 1 2 3 4 5 6 7 8 9
Single Exponential Smoothing (α=0.2)
Single Exponential Smoothing

2250 Actual
Predicted
Forecast
2150 Actual
US Housing S

Predicted
Forecast

2050

Smoothing Constant
1950 Alpha: 0.200

MAPE: 3.8
1850 MAD: 76.5
MSD: 13354.3

0 5 10
Time
Single Exponential Smoothing:
Optimal α
Single Exponential Smoothing

2240 Actual
Predicted
Forecast
2140 Actual
US Housing S

Predicted
Forecast
2040

Smoothing Constant
1940 Alpha: 0.017

MAPE: 3.7
MAD: 74.9
1840
MSD: 11845.7

0 5 10
Time
Double Exponential Smoothing
(α=0.2, β=0.2)
Double Exponential Smoothing for US Housing S

2250 Actual
2200 Predicted
Forecast
2150
Actual
US Housing S

2100 Predicted
Forecast
2050
2000
Smoothing Constants
1950 Alpha (level): 0.200
Gamma (trend): 0.200
1900
1850 MAPE: 4.0
MAD: 80.4
1800 MSD: 13972.4

0 5 10
Time
Double Exponential Smoothing:
Optimal α, β
Double Exponential Smoothing for US Housing S

Actual
2500 Predicted
Forecast
Actual
US Housing S

Predicted
Forecast

2000
Smoothing Constants
Alpha (level): 0.010
Gamma (trend): 99.990

MAPE: 11.5
1500 MAD: 230.7
MSD: 77792.9

0 5 10
Time
 Holt-Winter’s Multiplicative
Method:

Ideas behind smoothing with trend and

seasonality:

“De-trend’: and “de-seasonalize” time-series by
separating base from trend and seasonality
effects

Smooth base in usual manner using α

Smooth trend forecasts in usual manner using β

Smooth seasonality forecasts using γ
 Holt-Winter’s Multiplicative
Method:

Smooth the base forecast Bt
Yt
Bt = α + (1 − α )( B t − 1 + T t − 1 )
S t−m
(m = no. of seasons)

Smooth the trend forecast Tt
T t = β ( B t − B t −1 ) + (1 − β ) T t −1

Smooth the seasonality forecast St
Yt
St = γ + (1 − γ )S t −m
Bt
 Holt-Winter’s Multiplicative
Method:

Forecast Ft+k (k=1,2,…) with trend and

seasonality

Ft+k = (Bt + kTt )St+k−m

 Holt-Winter’s Multiplicative
Method: How do we start?

Bm = (Y1+…+Ym)/m

Tm =[{(Ys+1-Y1)/m} + {(Ys+2-Y2)/m} +…+
{(Ys+s-Ys)/m}]/m

S1=Y1/Bm, S2=Y2/Bm,…, Sm=Ym/Bm
 Holt-Winter’s Additive Method:

Smooth the base forecast Bt

B t = α ( Y t − S t − m ) + (1 − α )( B t − 1 + T t − 1 )
(m = no. of seasons)

Smooth the trend forecast Tt

T t = β ( B t − B t − 1 ) + (1 − β ) T t − 1

Smooth the seasonality forecast St

S t = γ ( Yt − B t ) + (1 − γ )S t −m
 Holt-Winter’s Additive Method:

Forecast Ft+k (k=1,2,…) with trend and

seasonality

Ft+k = Bt + kTt + St+k−m

Holt-Winter’s Additive Method:
How do we start?

Bm = (Y1+…+Ym)/m

Tm =[{(Ys+1-Y1)/m} + {(Ys+2-Y2)/m} +…+
{(Ys+s-Ys)/m}]/m

S1=Y1-Bm, S2=Y2-Bm,…, Sm=Ym-Bm
Holt-Winter’s Additive Method:
(α = β = γ =0.5)
Winters' Additive Model for Meals Served

Actual
15000
Predicted
14000 Forecast
Actual
Meals Served

13000 Predicted
Forecast
12000

11000 Smoothing Constants

Alpha (level): 0.500
10000 Gamma (trend): 0.500
Delta (season): 0.500
9000
MAPE: 5
MAD: 556
8000
MSD: 419183

0 5 10 15
Time