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Chapter 7
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Introduction
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Introduction
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Seasonal Pattern
Cyclical Pattern
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Horizontal Pattern
Exists when the data fluctuate randomly around a
constant mean over time
Stationary time series: denotes a time series whose
statistical properties are independent of time
The process generating the data has a constant mean
The variability of the time series is constant over time
A time series plot for a stationary time series will
always exhibit a horizontal pattern with random
fluctuations
Example
Consider the data show the number of gallons of
gasoline (in 1000s) sold by a gasoline distributor in
Bennington, Vermont, over the past 12 weeks. The
average value or mean for this time series is 19.25
or 19,250 gallons per week. Figure 1 shows a time
series plot for these data. Note how the data
fluctuate around the sample mean of 19,250
gallons.
Although random variability is present, we would
say that these data follow a horizontal pattern.
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Example
Suppose the gasoline distributor signs a contract
with the Vermont State Police to provide gasoline
for state police cars located in southern Vermont
beginning in week 13. With this new contract, the
distributor naturally expects to see a substantial
increase in weekly sales starting in week 13. Table
2 shows the number of gallons of gasoline sold for
the original time series and the ten weeks after
signing the new contract. Figure 2 shows the
corresponding time series plot. Note the increased
level of the time series beginning in week 13.
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Trend Pattern
A trend pattern is gradual shifts or movements to
relatively higher or lower values over a longer period
of time
A trend is usually the result of long-term factors such as:
Population increases or decreases
Shifting demographic characteristics of the population
Improving technology
Changes in the competitive landscape
Changes in consumer preferences
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Example
Consider the time series of bicycle sales for a
particular manufacturer over the past ten years, as
shown in Table 3 and Figure 3
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Example
Data in Table 4 and the corresponding time series plot in
Figure 4 show the sales revenue for a cholesterol drug since
the company won FDA approval for the drug ten years ago.
The time series increases in a nonlinear fashion; that is, the rate
of change of revenue does not increase by a constant amount
from one year to the next. In fact, the revenue appears to be
growing in an exponential fashion
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Seasonal Pattern
Seasonal patterns are recurring patterns over
successive periods of time
Seasonal patterns are short-term cyclic fluctuations
Example: A manufacturer of swimming pools expects low
sales activity in the fall and winter months, with peak sales
in the spring and summer months to occur every year
Time series plot not only exhibits a seasonal pattern
over a one-year period but also for less than one year
in duration
Example: daily traffic volume shows within-the-day
“seasonal” behavior
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Example
Consider the number of umbrellas sold at a clothing
store over the past five years. Table 5 shows the
time series and Figure 5 shows the corresponding
time series plot
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Example
The data in Table 6 and the corresponding time
series plot in Figure 6 show quarterly smartphone
sales for a particular manufacturer over the past
four years.
seasonal pattern
Table 6: Quarterly Smartphone Figure 6: Quarterly Smartphone
Sales Time Series Sales Time Series Plot
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Cyclical Pattern
A cyclical pattern exists if the time series plot shows an
alternating sequence of points below and above the
trendline that lasts for more than one year
Example: Periods of moderate inflation followed by
periods of rapid inflation can lead to a time series that
alternates below and above a generally increasing
trendline
Cyclical effects are often combined with long-term
trend effects and referred to as trend-cycle effects
tools
We need to use a forecasting method that is
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Forecast Accuracy
Forecast Error
Mean Forecast Error (MFE)
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Forecast Accuracy
Naïve forecasting method: Using the most recent data
to predict future data
The key concept associated with measuring forecast
accuracy is forecast error
Measures to determine how well a particular
forecasting method is able to reproduce the time series
data that are already available
Forecast error
Mean forecast error
Mean absolute error (MAE)
Mean squared error (MSE)
Mean absolute percentage error (MAPE)
Forecast Accuracy
30
= −
∑
MFE =
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Forecast Accuracy
∑
MFE =
31
Forecast Accuracy
∑
MAPE =
32
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Forecast Accuracy
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Exponential Smoothing
Forecast Accuracy
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∑ 92
MSE = = 9 = 10.22
∑ 129.21
MAPE = = = 14.36%
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= α + (1 – α)
Smoothing constant (α )is the weight given to the
actual value in period t; weight given to the
forecast in period t is 1 –α.
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Seasonality Effects
Considerations in Using Regression in
Forecasting
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