Holt’s Exponential Smoothing

Lesson #4

Holt’s Exponential Smoothing

Method

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 Holt’s Exponential Smoothing

Model Introduction
• A Smoothing technique designed to capture a trend.
• Estimates a Smoothing Equation.
• Uses the estimated smoothing Equation to forecast future values.
• Method Format:
– F(t+1) = a*X +( 1 – a) * F(t)
– T(t+1) = g * (F(t+1) – F(t)) + (1-g) * T(t)
– H(t+1) = F(t+1) + T(t+1)

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 Holt’s Exponential Smoothing

Model Details
• Method Characteristics
– Fits a Smoothing Equation to data
– Estimating a smoothing equation which minimizes the errors
between actual data points and model estimates
• When to use Method
– Data has no seasonality
• When not to use
– Data exhibits pattern such as seasonality or cyclicality.

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 Holt’s Exponential Smoothing

Forecasting Steps
1. Objective Setting
2. Method Selection
3. Model Evaluation
4. Find Best Models
5. Use Best Models

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 Holt’s Exponential Smoothing

Setting objective
• Simpler is better
• Holt’s Exponential smoothing allows to test whether a smoothing
technique with a trend works as a model. Objectives should take
that principal under consideration.
• Example Objectives for CPI (see next slide):
– Test if CPI can be fit to a trend exponential smoothing model
– If CPI exhibits a statistically significant fit, what is its magnitude
and does it make sense?
– If model looks good, Create a forecast based off model.

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 Holt’s Exponential Smoothing

Example: CPI

Consumer Price Index For All Urban Consumers: All Items (Index 1982-84=100)
250.000

200.000

150.000

100.000

50.000

0.000
1946-07-17 1960-03-25 1973-12-02 1987-08-11 2001-04-19

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 Holt’s Exponential Smoothing

Build Model
• Software finds us the best fit line to the data: (Minimizing the Sum
of Squared Errors)
Consumer Price Index For All Urban Consumers: All Items (Index 1982-
84=100)
250.000

200.000

150.000

100.000

50.000

0.000
1984-08-06 1987-05-03 1990-01-27 1992-10-23 1995-07-20 1998-04-15 2001-01-09 2003-10-06 2006-07-02 2009-03-28

Actual Forecast
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 Holt’s Exponential Smoothing

Evaluate Model
• Descriptive Statistics
– Mean
– Variance & Standard Deviation
• Accuracy / Error
– SSE
– RMSE
– MAPE
– R-Squared; Adjusted R-Squared
• Statistical Significance
– F-Test
– P-Value F-Test
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 Holt’s Exponential Smoothing

Example
Descriptive Statistics
• Mean
– 160.14
• Variance
– 1049.26
• SD (Standard Deviation)
– 32.39

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 Holt’s Exponential Smoothing

Example
Accuracy / Error
• SSE
– 75.20
• RMSE
– 0.50
• MAPE
– 0.17%
• R-Squared; Adjusted R-Squared
– 99.98%
– 99.98%

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 Holt’s Exponential Smoothing

Example
Statistical Significance
• F-Test
– 1230544.06
• P-Value F-Test
– 0.00

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 Holt’s Exponential Smoothing

Compare Multiple Models

• Skip this step until have knowledge of multiple methods.
• Will use Accuracy/Error statistics to compare multiple models to
find best models

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 Holt’s Exponential Smoothing

Use Model
• Understand Limitations of model .
• Answer Objectives.

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 Holt’s Exponential Smoothing

Example
• Forecast
– 217.59

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