COMPLETE

BUSINESS
STATISTICS
by
AMIR D. ACZEL
&
JAYAVEL SOUNDERPANDIAN
7th edition.

Prepared by Lloyd Jaisingh, Morehead State

University

Chapter 12
Time Series, Forecasting, and Index Numbers

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
 12-2

Time Series, Forecasting, and Index

12 Numbers
• Using Statistics
• Trend Analysis
• Seasonality and Cyclical Behavior
• The Ratio-to-Moving-Average Method
• Exponential Smoothing Methods
• Index Numbers
 12-3

12 LEARNING OBJECTIVES
After studying this chapter you should be able to:
• Differentiate between qualitative and quantitative methods of forecasting
• Carry out a trend analysis in time series data
• Identify seasonal and cyclical patterns in time series data
• Forecast using simple and weighted moving average methods
• Forecast using exponential smoothing method
• Forecast when the time series contains both trend and seasonality
• Assess the efficiency of forecasting methods using measures of error
• Make forecasts using templates
• Compute index numbers
 12-4

12-2 Trend Analysis

A time series is a set of measurements of a variable that are

ordered through time. Time series analysis attempts to detect
and understand regularity in the fluctuation of data over time.

Regular movement of time series data may result from a

tendency to increase or decrease through time - trend-
trend or from a
tendency to follow some cyclical pattern through time -
seasonality or cyclical variation.

Forecasting is the extrapolation of series values beyond the

region of the estimation data. Regular variation of a time series
can be forecast, while random variation cannot.
 12-5

12-2 Trend Analysis: Example 12-1

As can be seen
from the figure, the
observations may be
described by a
straight line. A simple
linear regression
equation is fit to the
data by least squares.
A straight-line model
to account for a trend
is of the form
Zt = 0 + 1t + at
 12-6

12-2 Trend Analysis: Example 12-1

The following output was obtained using the template.

Linear Model: Zt = 696.89 + 109.19t

Note: The template contains forecasts for t = 9 to t = 20 which corresponds to years 2008 to 2019 .
 12-7

12-2 Trend Analysis: Example 12-1

Straight line trend.

 12-8

12-2 Trend Analysis: Example 12-1

Trend Analysis Plot for Loans ($ billions)

Trend Analysis Plot for Loans ($ billions)
Growth Curve Model
Growth Curve Model
Yt = 765.843 * (1.09703**t)
Yt = 765.843 * (1.09703**t)
1700 Variable
1700 Variable
A ctual
1600 A ctual
1600 Fits
Fits
1500 A ccuracy Measures
1500 A ccuracy Measures
MAPE 1.084
Loans ($ billions)

1400 MAPE 1.084

Loans ($ billions)

MAD 12.894
1400 MAD 12.894
MSD 278.474
1300 MSD 278.474
1300
1200
1200
1100
1100
1000
1000
900
900
800
800
2000 2001 2002 2003 2004 2005 2006 2007
2000 2001 2002 2003 2004 2005 2006 2007
Year
Year

Growth Curve Model

 12-9

Example 12-2

The
forecast
for t = 10
(year 2008)
is 345.27

Observe that the forecast model is Zt = 82.96 + 26.23t

 12-10

Example 12-2

The
forecast
for t = 10
(year 2008)
is 345.27

The forecast model is Zt = 82.96 + 26.23t

 12-11

12-3 Seasonality and Cyclical

Behavior
Monthly Sales of Suntan Oil G ross Earnings: A nnual Monthly Numbers of Airline Passengers

200
20 11000

10000

Pas sengers
E a rning s
15
Sales

9000
100
8000
10
7000

0 5 6000 t
J FMAMJ J ASONDJ FMAMJ J ASONDJ FMAMJ J A 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 86 87 88 89 90 91 92 93 94 95
Time Year

Whenaacyclical
When cyclicalpattern
patternhas
hasaaperiod
periodofofone
oneyear,
year,ititisis
usuallycalled
usually calledseasonal
seasonalvariation.
variation. AApattern
patternwith
withaaperiod
period
ofother
of otherthan
thanone
oneyear
yearisiscalled
calledcyclical
cyclicalvariation.
variation.
 12-12

Time Series Decomposition

•• Typesof
Types ofVariation
Variation
Trend(T)
 Trend (T)
Seasonal(S)
 Seasonal (S)
Cyclical(C)
 Cyclical (C)
Randomor
 Random orIrregular
Irregular(I)
(I)
•• AdditiveModel
Additive Model
 ZZt =
t =TTt +
t +SS+
t
t +C
Ct +
t +IIt
t

•• MultiplicativeModel
Multiplicative Model
 ZZt =
t =(T
(Tt t)(S
)(St t)(C
)(Ct t)(I
)(It)t)
 12-13

Estimating an Additive Model with

Seasonality

Anadditive
An additiveregression
regressionmodel
modelwith
withseasonality:
seasonality:

ZZt= +11 t+
t=00+ t+22 Q
Q11++33 Q
Q22 ++ 44Q
Q33 ++ aat t

where
where
 QQ11=1
 =1ififthe
theobservation
observationisisin
inthe
thefirst
firstquarter,
quarter,and
and00
otherwise
otherwise
 QQ22=1
 =1ififthe
theobservation
observationisisin
inthe
thesecond
secondquarter,
quarter,and
and00
otherwise
otherwise
 QQ33=1
 =1ififthe
theobservation
observationisisin
inthe
thethird
thirdquarter,
quarter,and
and00
otherwise
otherwise
 12-14

12-4 The Ratio-to-Moving- Average

Method
AAmoving
movingaverage
averageofofaatime
timeseries
seriesisisan
anaverage
averageof
ofaafixed
fixed
numberof
number ofobservations
observationsthat
thatmoves
movesas aswe
weprogress
progressdown
downthethe
series.
series.
Time, t: 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Series, Ztt: 15 12 11 18 21 16 14 17 20 18 21 16 14 19
Five-period
moving average: 15.4 15.6 16.0 17.2 17.6 17.0 18.0 18.4 17.8 17.6

Time, t: 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Series, Ztt: 15 12 11 18 21 16 14 17 20 18 21 16 14 19
(15 + 12 + 11 + 18 + 21)/5=15.4
(12 + 11 + 18 + 21 + 16)/5=15.6
(11 + 18 + 21 + 16 + 14)/5=16.0
. . . . .
(18 + 21 + 16 + 14 + 19)/5=17.6
 12-15

Comparing Original Data and

Smoothed Moving Average
Original Series and Five-Period Moving Averages •• MovingAverage:
Moving Average:
“Smoother”
 “Smoother”
20 Shorter
 Shorter
Deseasonalized
 Deseasonalized
–
– Removesseasonal
Removes seasonaland
and
irregularcomponents
components
Z

15
irregular
Leavestrend
 Leaves trendand
andcyclical
cyclical
components
components
10
0 5 10 15
t
Z
t  TSCI  SI
MA TC
 12-16

Ratio-to-Moving Average

•• Ratio-to-MovingAverage
Ratio-to-Moving Averagefor
forQuarterly
QuarterlyData
Data
Computeaafour-quarter
 Compute four-quartermoving-average
moving-averageseries.
series.
Centerthe
 Center themoving
movingaverages
averagesby
byaveraging
averagingevery
everyconsecutive
consecutivepair
pairand
and
placingthe
placing theaverage
averagebetween
betweenquarters.
quarters.
Dividethe
 Divide theoriginal
originalseries
seriesby
bythe
thecorresponding
correspondingmoving
movingaverage.
average.Then
Then
multiplyby
multiply by100.
100.
Derivequarterly
 Derive quarterlyindexes
indexesbybyaveraging
averagingall
alldata
datapoints
pointscorresponding
correspondingtoto
eachquarter.
each quarter.Multiply
Multiplyeach
eachby
by400
400and
anddivide
divideby
bysum.
sum.
 12-17

Ratio-to-Moving Average: Example

12-3
Simple
Simple Centered
Centered Ratio
Ratio
Moving
Moving Moving
Moving totoMoving
Moving Four-Quarter Moving Averages
Quarter
Quarter Sales
Sales Average
Average Average
Average Average
Average 170 Actual
2004W
2004W 170
170 ** ** **
Smoothed
Actual
2004S
2004S 148
148 ** ** ** 160 Smoothed

2004S 141 ** 151.125 93.3

Sales
2004S 141 151.125 93.3 150
2004F
2004F 150
150 152.25
152.25 148.625
148.625 100.9
100.9 Moving Average
2005W
2005W 161
161 150.00
150.00 146.125
146.125 110.2
110.2 140 Length: 4
2005S
2005S 137
137 147.25
147.25 146.000
146.000 93.8
93.8 MAPE: 7.816
2005S
2005S 132
132 145.00
145.00 146.500
146.500 90.1
90.1
130 MAD:
MSD:
10.955
152.574
2005F
2005F 158
158 147.00
147.00 147.000
147.000 107.5
107.5 0 5 10 15
2006W
2006W 157
157 146.00
146.00 147.500
147.500 106.4
106.4 Time
2006S
2006S 145
145 148.00
148.00 144.000
144.000 100.7
100.7
2006S
2006S 128
128 147.00
147.00 141.375
141.375 90.5
90.5
2006F
2006F 134
134 141.00
141.00 141.000
141.000 95.0
95.0
2007W
2007W 160
160 141.75
141.75 140.500
140.500 113.9
113.9
2007S
2007S 139
139 140.25
140.25 142.000
142.000 97.9
97.9
2007S
2007S 130
130 140.75
140.75 ** **
2007F
2007F 144
144 143.25
143.25 ** **
 12-18

Seasonal Indexes: Example 12-3

Quarter
Quarter
Year
Year Winter
Winter Spring
Spring Summer
Summer Fall
Fall

2004
2004 93.3
93.3 100.9
100.9
2005
2005 110.2
110.2 93.8
93.8 90.1
90.1 107.5
107.5
2006
2006 106.4
106.4 100.7
100.7 90.5
90.5 95.0
95.0
2007
2007 113.9
113.9 97.9
97.9

Sum
Sum 330.5
330.5 292.4
292.4 273.9
273.9 303.4
303.4
Average
Average 110.17
110.17 97.47
97.47 91.3
91.3 101.13
101.13

SumofofAverages
Sum Averages==400.07
400.07
SeasonalIndex
Seasonal Index==(Average)(400)/400.07
(Average)(400)/400.07

Seasonal
Seasonal
Index
Index 110.15
110.15 97.45
97.45 91.28
91.28 101.11
101.11
 12-19

Deseasonalized Series: Example 12-3

Seasonal
Seasonal Deseasonalized
Deseasonalized Original and Seasonally Adjusted Series
Quarter
Quarter Sales
Sales Index(S)
Index (S) Series(Z/S)*100
Series(Z/S)*100
2004W
2004W 170
170 110.15
110.15 154.34
154.34 170
2004S
2004S 148
148 97.45
97.45 151.87
151.87
2004S
2004S 141
141 91.28
91.28 154.47
154.47 160
2004F
2004F 150
150 101.11
101.11 148.35
148.35
2005W 161 110.15 146.16

Sales
2005W 161 110.15 146.16 150
2005S
2005S 137
137 97.45
97.45 140.58
140.58
2005S
2005S 132
132 91.28
91.28 144.51
144.51 140
2005F
2005F 158
158 101.11
101.11 156.27
156.27
2006W
2006W 157
157 110.15
110.15 142.53
142.53 130
2006S
2006S 145
145 97.45
97.45 148.79
148.79 1992W 1992S 1992S 1992F
2006S
2006S 128
128 91.28
91.28 140.23
140.23
2006F 134 101.11 132.53 t
2006F 134 101.11 132.53
2007W
2007W 160
160 110.15
110.15 145.26
145.26 Original Deseasonalized - - -
2007S
2007S 139
139 97.45
97.45 142.64
142.64
2007S
2007S 130
130 91.28
91.28 142.42
142.42
2007F
2007F 144
144 101.11
101.11 142.42
142.42
 12-20

The Cyclical Component:

Example 12-3
Trend Line and Moving Averages Thecyclical
The cyclicalcomponent
componentisis
180 theremainder
the remainderafter
afterthe
the
170 movingaverages
moving averageshave
havebeen
been
160 detrended. In
detrended. Inthis
thisexample,
example,
Sales

150 aacomparison
comparisonof ofthe
themoving
moving
140 averagesand
averages andthe
theestimated
estimated
130 regressionline:
regression line:
120
1992W 1992S 1992S 1992F
Z  155.275  11059
. t
t illustratesthat
illustrates thatthe
thecyclical
cyclical
componentin
component inthis
thisseries
seriesisis
negligible.
negligible.
 12-21

Example 12-3 using the Template

Thecentered
The centeredmoving
movingaverage,
average,ratio
ratiototomoving
movingaverage,
average,seasonal
seasonalindex,
index,and
anddeseasonalized
deseasonalized
valueswere
values weredetermined
determinedusing
usingthe
theRatio-to-Moving-Average
Ratio-to-Moving-Averagemethod.
method.

This is a partial output for the quarterly forecasts.

 12-22

Example 12-3 using the Template

Graph of the quarterly Seasonal Index

 12-23

Example 12-3 using the Template

Graph of the Data and the quarterly Forecasted values

 12-24

Example 12-3 using the Template

Thecentered
The centeredmoving
movingaverage,
average,ratio
ratiototomoving
movingaverage,
average,seasonal
seasonalindex,
index,and
anddeseasonalized
deseasonalized
valueswere
values weredetermined
determinedusing
usingthe
theRatio-to-Moving-Average
Ratio-to-Moving-Averagemethod.
method.

This displays just

a partial output
for the monthly
forecasts.
 12-25

Example 12-3 using the Template

Graph of the monthly Seasonal Index

 12-26

Example 12-3 using the Template

Graph of the Data and the monthly Forecasted values

 12-27

Forecasting a Multiplicative Series:

Example 12-3

The forecast of a multiplicative series :

Zˆ = TSC

Forecast for Winter 2002 (t = 17) :

Trend : ẑ = 152.26 - (0.837)(17) = 138.03

S = 1.1015
C  1 (negligible)

Zˆ = TSC
= (1)(138.03)(1.1015) = 152.02
 12-28

Multiplicative Series: Review

ZZ ((Trend
Trend)(
)(Seasonal
Seasonal((Cyclical
Cyclical)(
)(Irregular
Irregular))
TSCI
TSCI

MA((Trend
MA Trend)(
)(Cyclical
Cyclical))
TC
TC

ZZ  TSCI
TSCI
SI
SI
MA  TC 
MA TC

SS == Average
Averageof
ofSI
SI(Ratio
(Ratio--to
to--Moving
MovingAverages)
Averages)

ZZ  TSCI
TSCI
CTI
CTI(Deseasonalized
(DeseasonalizedData)
Data)
 
SS SS
 12-29

12-5 Exponential Smoothing Methods

Smoothingisisused
Smoothing usedto
toforecast
forecastaaseries
seriesby
byfirst
firstremoving
removingsharp
sharp
variation,as
variation, asdoes
doesthe
themoving
movingaverage.
average.
Weights Decline as we go back Exponentialsmoothing
Exponential smoothingisisaaforecasting
forecasting
in Time methodininwhich
method whichthe
theforecast
forecastisisbased
basedinin
Weights Decline as We Go Back in Time and Sum to 1 aaweighted
weightedaverage
averageofofcurrent
currentand
andpast
past
seriesvalues.
series values. The
Thelargest
largestweight
weightisis
0.4
giventotothe
given thepresent
presentobservations,
observations,lessless
0.3
weighttotothe
theimmediately
immediatelypreceding
preceding
Weight

weight
W eig ht

0.2 observation,even
observation, evenless
lessweight
weighttotothe
the
0.1 observationbefore
observation beforethat,
that,and
andso
soon.
on. The
The
0.0 weightsdecline
weights declinegeometrically
geometricallyas aswe
wegogo
-15 -10
Lag
-5 0
backin
back intime.
time.

-10 Lag 0
 12-30

The Exponential Smoothing Model

Given a weighting factor: 0 < w < 1:

2 3
Z t 1  w ( Z t )  w (1  w )( Z t 1 )  w (1  w ) ( Z t  2 )  w (1  w ) ( Z t  3 ) 

Since
2 3
Z t  w ( Z t 1 )  w (1  w )( Z t  2 )  w (1  w ) ( Z t  3 )  w (1  w ) ( Z t  4 ) 
2 3
(1  w ) Z t  w (1  w )( Z t 1 )  w (1  w ) ( Z t  2 )  w (1  w ) ( Z t  3 ) 

So

Z t 1  w(Z t )  (1  w)(Z t )

Z t 1  Z t  (1  w)(Z t - Z t )
 12-31

Example 12-4

Day
Day ZZ w=.4
w=.4 w=.8
w=.8 Exponential Smo othing: w=0.4 and w=0.8
960
11 925
925 925.000
925.000 925.000
925.000
22 940
940 925.000
925.000 925.000
925.000 950

33 924
924 931.000
931.000 937.000
937.000 940

w=.4
44 925
925 928.200
928.200 926.600
926.600
55 912
912 926.920
926.920 925.320
925.320 930

66 908
908 920.952
920.952 914.664
914.664 920
77 910
910 915.771
915.771 909.333
909.333
88 912
912 913.463
913.463 909.867
909.867 910

99 915
915 912.878
912.878 911.573
911.573 0 5 10 15
10
10 924
924 913.727
913.727 914.315
914.315
Day
11
11 943
943 917.836
917.836 922.063
922.063 Original data:
12
12 962
962 927.902
927.902 938.813
938.813
13 960 941.541 957.363 Smoothed, w=0.4: ......
13 960 941.541 957.363
14 958 948.925 959.473 Smoothed, w=0.8: -----
14 958 948.925 959.473
15
15 955
955 952.555
952.555 958.295
958.295
16
16 ** 953.533
953.533 955.659
955.659
 12-32

Example 12-4 – Using the Template

 12-33

12-6 Index Numbers

Anindex
An indexnumber
numberisisaanumber
numberthat
thatmeasures
measuresthe
therelative
relative
changein
change inaaset
setof
ofmeasurements
measurementsover
overtime.
time. For
Forexample:
example:the
the
DowJones
Dow JonesIndustrial
IndustrialAverage
Average(DJIA),
(DJIA),the
theConsumer
ConsumerPrice
Price
Index(CPI),
Index (CPI),the
theNew
NewYork
YorkStock
StockExchange
Exchange(NYSE)
(NYSE)Index.
Index.
Value in period i
Index number in period i: = 100
Value in base period
Changing the base period of an index:
Old index value
New index value: = 100
Index value of new base
 12-34

Index Numbers: Example 12-5

Index
Index Index
Index Price and Index (1982=100) of Natural Gas Price
Year Price
Year Price 1984-Base
1984-Base 1991-Base
1991-Base
1984
1984 121
121 100.0
100.0 64.7
64.7
250

1985 121 100.0 64.7 Original

1985 121 100.0 64.7
1986
1986 133
133 109.9
109.9 71.1
71.1 Index (1984)

P r ic e
1987
1987 146
146 120.7
120.7 78.1
78.1 150
1988
1988 162
162 133.9
133.9 86.6
86.6 Index (1991)
1989
1989 164
164 135.5
135.5 87.7
87.7
1990
1990 172
172 142.1
142.1 92.0
92.0 50
1991
1991 187
187 154.5
154.5 100.0
100.0 1985 1990 1995
1992 197 162.8 105.3 Year
1992 197 162.8 105.3
1993
1993 224
224 185.1
185.1 119.8
119.8
1994
1994 255
255 210.7
210.7 136.4
136.4
1995
1995 247
247 204.1
204.1 132.1
132.1
1996
1996 238
238 196.7
196.7 127.3
127.3
1997
1997 222
222 183.5
183.5 118.7
118.7
 12-35

Consumer Price Index – Example 12-6

Consumer Price index (CPI): 1967=100 Example12-6:

Example 12-6:
450

Salary
Adjusted Salary = 100
350
CPI
Adjusted
Adjusted
CPI

250
Year
Year Salary Salary
Salary Salary
150
1980
1980 29500 11953.0
29500 11953.0
1981
1981 31000 11380.3
31000 11380.3
50 1982
1982 33600 11610.2
33600 11610.2
19 50 19 55 19 60 196 5 197 0 197 5 1980 1 985 1 990 19 95
1983
1983 35000 11729.2
35000 11729.2
Ye a r 1984
1984 36700 11796.8
36700 11796.8
1985
1985 38000 11793.9
38000 11793.9
 12-36

Consumer Price Index – Example 12-6

Scatterplot of CPI vs Year

Scatterplot of CPI vs Year Example12-6:
Example 12-6:
600
600
Salary
500
500 Adjusted Salary = 100
CPI
400
400 Adjusted
Adjusted
Year Salary Salary
Salary
CPI

Year Salary
CPI

300
300

200
1980
1980 29500 11953.0
29500 11953.0
200
1981
1981 31000 11380.3
31000 11380.3
100
100 1982
1982 33600 11610.2
33600 11610.2
0
0 1983
1983 35000 11729.2
35000 11729.2
1950 1960 1970 1980 1990 2000 2010
1950 1960 1970 1980
Year
Year
1990 2000 2010
1984
1984 36700 11796.8
36700 11796.8
1985
1985 38000 11793.9
38000 11793.9
 12-37

Example 12-6: Using the Template