Basis of ALPHA, BETA and GAMMA selection in Seasonal + Trend model

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Hi All DP consultants,
I am using Seasonal trend model.
Here is the data of iteration : alpha - 0.15, beta - 0.25, gamma - 0.20, RMSE -
543.30,
alpha - 0.10, beta - 0.25, gamma - 0.20, RMSE - 329.13
Now should I consider the selection which gives lowest RMSE valu??? But in this
case forecast values are also reduced so obveously RMSE will also reduce...
Or IS THERE ANY OTHER STANDARD METHOD OF DECIDING VALUES OF ALPHA< BETA AND GAMM
A IN SEASONAL TREND MODEL.
DETAILED SUGGESTIONS WILL BE HIGHLY APPRECIATED AND REWARDED FOR SURE..
Best Regards,
Chandan Dubey

chandan dubey
July 08, 2008 at 15:55 PM
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Correct Answer
SAP Employee Julien Le Brun replied July 08, 2008 at 13:13 PM
Hi Chandan,
I agree the forecast error measurements are not always the best indicators to se
lect a statistical model.
The best solution in my opinion is to use the real forecast accuracy. This activ
ity is usually done only once before the implementation:
To do so you need to perform the forecast as if you were in the past (for exampl
e 6 months in the past). This require 6 extra months of historical data.
you can then compare different forecasts result with the real data (the last 6 m
onths).
This will allow you to compare forecast against actual for a specific period of
time (6 months), instead of ex post forecast against actual,month by month.
Please note that this activity required a lot of time and effort. However I gues
s that if you compare the forecast for month 6 to actual, the alpha=0.01 will no
t give you a so good result...
In addition, I would to mention some points:
- Usually we try to keep the alpha factor higher than 0.1. Below that I do not t
hink the model is really consistent.The forecast error measurements can help you
to compare different models, but these models should be comparable first
- Depending on your version different automodels exist (i.e. 56) to help you to
define the factors. They are pretty good guidance in my opinion.
- "Alpha methods" are not always the best methods to use, and are sometimes conf
using for the planner. Did you try the linear regression model? (you can use sea
sonality as well: 35)
I hope it will help you a bit,
Kind regards,
Julien
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4 replies

Virendra Sharma replied July 07, 2008 at 19:04 PM

The model parameters, Alpha, Beta, and Gamma, control the
weighting of each historical values.
Alpha is used in the basic value calculation
Beta is used in trend value calculation
Gamma is used in the Seasonal index calculation
The value for the parameters range from 0 to 1. A higher value will
place more emphasis on recent history.
The parameters also control how reactive the forecast is to changes in historica
l patterns..
There are models which help you in automatically calculating the value of alpha
but they also involve statistics calculation like tracking signal & even they al
so depend upon initilised value of alpha ,beta , gama . One has to analyse data
, Initialise these values , run forecasting , check errors & iterate and refine
results .Data analysis is very important and it guides about inital value , bett
er initial value you will choose , less iteration is required .
A data with significant trend and seasonal pattern would need higher values.
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chandan dubey replied July 08, 2008 at 08:54 AM
Hi,
What you have explained is the very basic theory of parameters determination. So
is it a strategic decision (decesion taken by business) to give more importance
to recent history (by increasing ALPHA value) and/or giving trend a more weight
age (by increasing BETA) ?
If that is not a strategic decisoin then how a planner will come to know the opt
imum ALPHA , BETA values??
As i said earlier I kept on reducing ALPHA, RMSE reduced. I reduced ALPHA to a v
alue of 0.01 and RMSE was minumum at that point of time. Now reducing ALPHA to 0
.01 is foolish , you must be knowing that.
So does planner arrange a meeting with business and decide whether to give more
importance to recent history or how do they have to deal with sesonality.
I would highly appreciate an expert comment if possible .
Regards,
Chandan Dubey
0 likes
Correct Answer
SAP Employee Julien Le Brun replied July 08, 2008 at 13:13 PM
Hi Chandan,
I agree the forecast error measurements are not always the best indicators to se
lect a statistical model.
The best solution in my opinion is to use the real forecast accuracy. This activ
ity is usually done only once before the implementation:
To do so you need to perform the forecast as if you were in the past (for exampl
e 6 months in the past). This require 6 extra months of historical data.
you can then compare different forecasts result with the real data (the last 6 m
onths).
This will allow you to compare forecast against actual for a specific period of
time (6 months), instead of ex post forecast against actual,month by month.
Please note that this activity required a lot of time and effort. However I gues
s that if you compare the forecast for month 6 to actual, the alpha=0.01 will no
t give you a so good result...
In addition, I would to mention some points:
- Usually we try to keep the alpha factor higher than 0.1. Below that I do not t
hink the model is really consistent.The forecast error measurements can help you
to compare different models, but these models should be comparable first
- Depending on your version different automodels exist (i.e. 56) to help you to
define the factors. They are pretty good guidance in my opinion.
- "Alpha methods" are not always the best methods to use, and are sometimes conf
using for the planner. Did you try the linear regression model? (you can use sea
sonality as well: 35)
I hope it will help you a bit,
Kind regards,
Julien
------------------------------------------------------------
chandan dubey replied July 08, 2008 at 15:55 PM
Hi julien,
Appreciate your comments and starting with tyhe procedure suggested by you. Than
ks a lot !!
Best Regards,
Chandan Dubey