Introduction to Time Series Models

Types of Forecasting Methods

There are a number of classifications of forecast

methods;
Qualitative vs Quantitative

Time Series vs Causal

The above classifications are not mutually

exclusive

The forecaster needs to be aware of the

appropriate method to match the forecast
situation
2
Quantitative vs Qualitative
Prediction
It should be noted that mostly forecasts will be of
variables that are measured quantitatively e.g.: sales,
costs, exchange rates

The distinction between quantitative and qualitative

is how the prediction is derived.

Quantitative – the prediction is derived using some

algorithm or mathematical technique based on
quantitative data
Qualitative – the prediction is based primarily on
judgment or opinion 3
Time Series vs Causal

Time Series – These are methods which rely on

the past measurements of the variable of
interest and no other variables, e.g.: moving
average, exponential smoothing, decomposition,
extrapolation

Causal methods – where the prediction of the

target series or variable is linked to other
variables or time series, e.g.: regression,
correlation and leading indicator methods.

4
Sources of Data

Predictions and forecasts are based on relevant

current and past data.

The data sources can be classified into internal

and external;
Internal – sources that come from within the
organisation- eg sales data, employment records,
customer profiles and spending
External – data that is sourced from outside the
organisation e.g.: ABS data, other govt. agencies,
internet, trade organisations, commercial data
agencies. 5
Types of Data
A useful classification of data for forecasting is;

Time Series: A sequence of measurements on a

variable taken over specified successive intervals of
time
e.g.: monthly interest rates, sales/week, tourist
arrivals per annum

Cross-Sectional: Measurements on a variable that

are at one point in time but spread across a
population
e.g.: tourism spend across age groups, production
across sectors of the economy 6
 Time Series Example
Consider annual Sales
Sales ($m)
($m) data from 2007 to 2016 140

Year Sales ($m)

120
2007 34
2008 44 100

2009 57
80
2010 67
2011 81
60
2012 89
2013 99 40

2014 112
20
2015 117
2016 125
0
2006 2008 2010 2012 2014 2016 2018
7
 Forecasts for 2017 and 2018?

Sales ($m)
140

120

100

80

60

40

20

0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
8
 Forecasts for 2017 and 2018?

Sales ($m)
140

120

100

80

60

40

20

0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
9
Sales, Trend Line and
Forecasts
Sales, Trend and Forecasts
160

140

120

Forecasts
100
2017, 2018
80

60

40

20

0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Sales ($m) Trend Forecasts
10
Analysing the 2017, 2018 Forecasts

The previous example highlighted a number of key

points;

1. Evaluation of the time series for historical

patterns

2. Matching observed pattern to a relevant

algorithm (in this case a trend line)

3. Projection of the algorithm into the future for

forecasts
11
Exploring Time Series
Patterns
There are various patterns that are typically
associated with time series

These patterns can usually be ascribed to various

components of time series

The systematic components are typically

due to explainable factors

The forecaster needs to understand the

components of the time series to match the
appropriate forecast method or algorithm
12
Components of a Time Series
The components of a time series are:

▪ Level
▪ Trend
▪ Seasonal
▪ Cyclical
▪ Random

The random component is the only non-

systematic component
13
 Level

Indicates the underlying value Data: GBP/$A exchange rate

of the series on the vertical For 12 days in January 2017
axis for a given time period.
GBP/$A Exchange Rate
0.6200
The level of the time series
may be constant over time 0.6190
0.6188
0.6184
or may change with the 0.6180 0.6180
0.6178

influence of the other 0.6170

components. 0.6160
0.6162
0.6164

0.6156
0.6153 0.6152
0.6150 0.6149
If the level remains relatively 0.6144
0.6146

constant over the entire time 0.6140

series a horizontal data 0.6130

pattern is observed 0.6120 14

1 2 3 4 5 6 7 8 9 10 11 12
 Trend

Tendency for the underlying Data: Number of Credit Card

level of the time series to Accounts (000s) monthly, Jan
systematically increase or 2015 – Oct 2016
decrease from period to CC Accounts (000's)
period 16800

16600
The trend need not be
consistent over the entire 16400

time series or linear.

16200

Trends are usually caused by 16000

population changes,
15800
technology changes,
market expansions etc. 15600 15

Jan-2015
Apr-2015
Jul-2015
Oct-2015
Jan-2016
Apr-2016
Jul-2016
Oct-2016
Jan-2017
 Further Trend Example

Data: Passenger Vehicle Sales (Australia), monthly 000’s

Passenger Vehicle Sales (000's)
43500

43000

42500

42000

41500

41000

40500

40000

39500

39000
Dec-2014 Mar-2015 Jun-2015 Sep-2015 Dec-2015 Mar-2016 Jun-2016 Sep-2016 Dec-2016 16
 Seasonality

Systematic and repeatable Data: Food Sales ($m), NSW quarterly

fluctuations in the time Jan-2010 to Dec-2016
series that usually occur within Food Sales (m)
a well defined time period 13000.0

(year, week).
12000.0

Fluctuations typically repeat 11000.0

themselves in future
iterations of the set time 10000.0

period 9000.0

Occurs due to weather or 8000.0

institutional reasons e.g.: 7000.0

holidays, special celebrations
or accounting periods 6000.0 17
Dec-2009 Dec-2011 Dec-2013 Dec-2015
 Further Seasonal Example

Overseas Visitors
1000000

900000

800000

700000

600000

500000

400000

300000

200000
Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

18
 Cyclical

Similar to seasonal fluctuations Data: Non-residential value, Aust.

but the cycle period is not as
regular as seasonality
This makes the cyclical
quarterly Dec-81 to Dec 16
Building - Non-Residential
Value
8000000

component difficult to 7000000

predict 6000000

5000000
It is usually subjectively
4000000
assessed
3000000

2000000
Generally the economic
cycle will influence 1000000

the cyclical behaviour of the 0

Dec-15
Dec-01
Dec-03
Dec-05
Dec-07
Dec-09
Dec-81
Dec-83
Dec-85

Dec-89
Dec-91
Dec-93
Dec-95
Dec-97
Dec-99
Dec-87

Dec-11
Dec-13

Dec-17
series. 19
 Random

The random component is non-systematic and not able

to be predicted with any accuracy

Typically the random component incorporates effects on the

time series that cannot be explained by the variables
that influence the systematic components

Includes one-off effects such as introduction of GST,

cataclysmic events (e.g.: a tsunami) or difficult to observe
and quantify effects such as confidence and security

The extent of the random component will determine the

maximum level of forecast accuracy achievable
20