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data:
collected at a single point in time. A Time series: collected, and recorded over successive increments of time. (Page 62)
2
(stationary).
A Stationary Series
Its mean and variance remain constant over time
3
The long-term component that represents the growth or decline in the time series.
The Trend
Cost
Cyclical Peak 20 15
Trend Line
Cyclical Valley
10
10
Year
20
Page (63)
4
FIGURE 3-2 Trend and Cyclical Components of an Annual Time Series Such as Housing Costs
650
Y
400 300 200 100 2
10
12 14 Index
16
18
20
22
24
Page (64)
5
FIGURE 3-3 Electrical Usage for Washington water Power Company, 1980-1991
(Y Y )(Y
t n t 1 t
t k 2
(Y Y )
Yt
Table 3-1
(page 65)
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Example 3.1
Data are presented in Table 3-1 (page 65). Table 3-2 shows the computations that lead to the calculation of the lag 1 autocorrelation coefficient. Figure 3-4 contains a scatter diagram of the pairs of observations (Yt, Yt-1). Using the totals from Table 3-2 and Equation 3.1:
r1
t 11
(Y Y )(Y
t n t 1 t
t 1 2
Y)
(Y Y )
Autocorrelation
FIGURE 3-5 Correlogram or Autocorrelation Function for the Data Used in Example 3.1
Are Are
successive values are not related to each other. Almost all the autocorrelation coefficients are significantly different from zero.
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-At a specified confidence level, a series can be considered random if the autocorrelation coefficients are within the interval [0 t SE(rk)],
(3.2)
Where:
ri = the autocorrelation at time lag k. k = the time lag n = the number of observations in the time series
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Example 3.2
A hypothesis test:
(Page 69)
Decision Rule:
If t < -2.2 or t > 2.2, reject H: rk = 0
Note: t is given directly in the Minitab output under the heading T.
14
rk2 Q n(n 2) k 1 n k
m
(3.3)
Where:
n= number of observations K= the time lag m= number of time lags to be considered rk= kth autocorrelation coefficient lagged k time periods
The value of Q can be compared with the chi-square with m degrees of freedom.
16
Yt
343 574 879 728 37 227 613 157 571 72
t
11 12 13 14 15 16 17 18 19 20
Yt
946 142 477 452 727 147 199 744 627 122
t
21 22 23 24 25 26 27 28 29 30
Yt
704 291 43 118 682 577 834 981 263 424
t
31 32 33 34 35 36 37 38 39 40
Yt
555 476 612 574 518 296 970 204 616 17 97
Autocorrelation Function
1.0 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0
Autocorrelation
10
Lag 1 2 3 4 5 6 7
Lag 8 9 10
FIGURE 3-7 Autocorrelation Function for the Data Used in Example 18 3.3
Q<
2 0.05
19
20
1956
1957 1958
3556
3601 3721
1967
1968 1969
7296
8178 8844
1978
1979 1980
17946
17514 25195
1989
1990 1991
53794
55972 57242
1959
1960
4036
4134
1970
1971
9251
10006
1981
1982
27357
30020
1992
1993
52345
50838
1961
1962 1963 1964 1965
4268
4578 5093 5716 6357
1972
1973 1974 1975 1976
10991
12306 13101 13639 14950
1983
1984 1985 1986 1987
35883
38828 40715 44282 48440
1994
1995 1996 1997 1998
54559
34925 38236 41296 .
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Data Differencing
A time series can be differenced to remove the trend and to create a stationary series. See FIGURE 3-8 (Page 73) for differencing the Data of Example 3.1 See FIGURES 3-12, 3-13 (Page 75)
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quarterly data: a significant autocorrelation coefficient will appear at time lag 4. For monthly data: a significant autocorrelation coefficient will appear at time lag 12.
23
1995
1996 1997 1998
139.3
140.5 168.8 259.7
221.2
245.5 322.6 401.1
260.2
298.8 393.5 464.6
259.5
287.0 404.3 497.7
1999
2000 2001 2002 2003 2004 2005
264.4
232.7 205.1 193.2 178.3 190.8 242.6
402.6
309.2 234.4 263.7 274.5 263.5 318.8
411.3
310.7 285.4 292.5 295.4 318.8 329.6
385.9
293.0 258.7 315.2 286.4 305.5 338.2
24
2006
232.1
285.6
291.0
281.4
Autocorrelation Function
1.0 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0
Autocorrelation
12
Lag 1 2 3 4 5 6 7
Lag 8 9 10 11 12 13
FIGURE 3-15 Autocorrelation Function for quarterly Sales for Coastal Marine for Example 3.5
Autocorrelation coefficients at time lags 1 and 4 are significantly 26 different from zero, Sales are seasonal on quarterly basis.
Why is a forecast needed? Who will use the forecast? What are the characteristics of the data? What time period is to be forecast? What are the minimum data requirements? How much accuracy is required? What will the forecast cost?
27
Define the nature of the forecasting problem. Explain the nature of the data. Describe the properties of the techniques. Develop criteria for selection.
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Factors Considered:
Level of Details. Time horizon. Based on judgment or data manipulation. Management acceptance.
Cost. 29
Uses
Can be used in the absence of historical data (e.g. new product). Most helpful in mediumand long-term forecasts Sophisticated method Very good for medium- and long-term forecasts Easy to implement Work well when the series is relatively stable
Considerations
Subjective estimates are subject to the biases and motives of estimators.
Causal
Must have historical data. Relationships can be difficult to specify Rely exclusively on past data. Most useful for short-term estimates.
Time series
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Method
Nave Simple averages Moving averages Single Exponential smoothing Linear (Double) exponential smoothing (Holts) Quadratic exponential smoothing Seasonal exponential smoothing (Winters) Adaptive filtering Simple regression
Pattern of Data
ST , T , S ST ST ST T T S S T
Time Horizon
S S S S S S S S I
Type of Model
TS TS TS TS TS TS TS TS C
Seasonal
Multiple regression
Classical decomposition Exponential trend models S-curve fitting Gompertz models Growth curves Census X-12 ARIMA (Box-Jenkins) Lading indicators Econometric models
C,S
S T T T T S ST , T , C , S C C
I
S I,L I,L I,L I,L S S S S
C
TS TS TS TS TS TS TS C C
10 x V
5xs 10 10 10 10 6xs 24 24 30 6xs 3xs
Time series multiple regression T,S I,L C Pattern of data: ST, stationary; T, trended; S, seasonal; C, cyclical. Time horizon: S, short term (less than three months); I, intermediate; L, long term Type of model: TS, time series; C, causal. Seasonal: s, length of seasonality. of Variable: V, number variables.
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e t = Yt -
Yt
Yt n 1 (Yt Yt ) MPE n t 1 Yt
33
1 n MAPE n t 1
Yt Yt
Used for:
The measurement of a technique usefulness or reliability. Comparison of the accuracy of two different techniques. The search for an optimal technique.
Results of the forecast accuracy for a sample of 3003 time series (1997):
Complex methods do not necessarily produce more accurate forecasts than simpler ones. Various accuracy measures (MAD, MSE, MAPE) produce consistent results. The performance of methods depends on the forecasting horizon and the kind of data analyzed( yearly, quarterly, monthly).
35
Are the residuals indicate a random series? (Examine the autocorrelation coefficients of the residuals, there should be no significant ones)