FORECASTING

AND
TIME SERIES

The Method of Least

Squares
Among the methods of fitting a straight line
to a series of data, this is the most
frequently used method. As we have seen
earlier that the equation of a straight line
is y = a + bx, where Y is the time period,
say, year x is the value of the item
measured against time, a is the y-intercept
and b is the coefficient of X that shows the
slope of the straight line. In order to find
out the values of a and b, the following
two equations are solved:
y = na + b x
xy =a x +b x2

E.G. (METHOD OF LEAST

SQUARES)
A COMPANY THAT MANUFACTURES STEEL OBSERVED
THE PRODUCTION OF STEEL IN METRIC TONNES
REPRESENTED BY TIME SERIES
YEAR

PRODUCTION OF
STEEL

1996

60

1997

72

1998

75

1999

65

2000

80

2001

85

2002

95

FIND THE LINEAR EQUATION THAT DESCRIBES THE

TREND IN THE PRODUCTION OF STEEL BY THE
COMPANY?
ESTIMATE THE PRODUCTION OF STEEL IN YEAR
2003,2004

YEAR

1996
1997
1998
1990
2000
2001
2002

TIME PRODUCTI
SCALE
ON (Y)
(X)
1
2
3
4
5
6
7

60
72
75
65
80
85
95

XY

Exponential Smoothing
Method
It is a type of moving average
forecasting technique
It weighs past data from previous
time periods with exponentially
decreasing importance in the
forecast so that the recent data
carries more weight

Exponential Smoothing
Method

Simple Exponential Smoothing

F (t+1) = Xt + (1- ) Ft = Ft + (Xt Ft)
Where
F (t+1) = forecast for next time period
Ft = forecast for present time period
= a weight called exponential
smoothing constant (0 1)
Xt = actual value for present time period

Example
A firm uses simple exponential
smoothing with =0.1 to forecast
demand. The forecast for the week of
Feb 1 was 500 units, whereas actual
demand was 450 units.
(a) Forecast demand for week of Feb
8?

Example
A firm uses simple exponential
smoothing with =0.1 to forecast
demand. The forecast for the week of
Feb 1 was 500 units, whereas actual
demand was 450 units.
(a) Forecast demand for week of Feb
8
Solution
F(t+1) = 500 + 0.1(450-500) = 495
units

MEASUREMENT OF SEASONAL
EFFECTS
Seasonal effects arise as the result of
changes in the seasons during the
year or may result due to habits ,
customs , or festival that occur at the
same time year after year
We have three main reasons to study
seasonal effects
1. The description of seasonal effect
provides a better understanding of the
impact this component has upon a
particular time series

MEASUREMENT OF SEASONAL
EFFECTS
2. Once the seasonal pattern that exists is
established, seasonal effect can be eliminated
from the time series in order to observe the effect
of the other components, such as cyclical and
irregular components. Elimination of seasonal
effect from the series is referred to as
deasonalising or seasonal adjusting
3. Trend analysis may be adequate for long range
forecast , but for short run predictions, knowledge
of seasonal effects on time series data is essential
for projection of past pattern into the future

MEASUREMENT OF SEASONAL
EFFECTS
Seasonal Index
Are measured in terms of an index,
called seasonal index, attached to
each period of time series within a
year
If monthly data are considered, there
are 12 separate indexes of each
month
Similarly for quarterly data there are
4 separate indexes for each quarter

Example
The data on prices (Rs in per kg) of a
certain commodity during 2000 to
2004 are shown below.
Calculate the seasonal indexes by the
average percentage method (SIMPLE
AVERAGES METHOD) and obtain deseasonalized values

Example
Year
2000
2001
2002
2003
2004

Quart
er 1
45
48
49
52
60

Quart
er 2
54
56
63
65
70

Quart
er 3
72
63
70
75
84

Quart
er 4
60
56
65
72
66

Example
Year

Quarter
1
2000
45
2001
48
2002
49
2003
52
2004
60
Quarterl 254
y
Total
Quarterl
y
Average

Quarter
2
54
56
63
65
70
308

Quarter
3
72
63
70
75
84
364

Quarter
4
60
56
65
72
66
319

Example

Year
2000
2001
2002
2003
2004
Quarte
rly
Total
Quarte
rly
Averag
e

Quarter 1
45
48
49
52
60
254
(45+48+4
9+52+60)
50.8
(254/5=50
.8)

Q2
54
56
63
65
70
308

Q 3
72
63
70
75
84
364

Q4
60
56
65
72
66
319

61.6

72.8

63.8

Example

Calculation of seasonal index

Average of quarterly averages
= [50.5+61.6+72.8+63.8] / 4 = 62.25
Seasonal index for quarter 1 =
50.8/62.25 x 100 = 81.60
Seasonal index for quarter 2 =
61.6/62.25 x 100 = 98.95
Seasonal index for quarter 3 =
72.8/62.25 x 100= 116.94
Seasonal index for quarter 4 =
63.8/62.25 x 100 = 102.48

Example
Year

Quarter
1
2000
45
2001
48
2002
49
2003
52
2004
60
Quarter 254
ly
Total
Quarter 50.8
ly
Average

Quarter
2
54
56
63
65
70
308

Quarter
3
72
63
70
75
84
364

Quarter
4
60
56
65
72
66
319

61.6

72.8

63.8

Example
Deasonalized Values
Seasonalized influences are
removed from a time series data by
dividing the actual y value for each
quarter by its corresponding
seasonal index
Deseasonalized value =[ actual
quarterly value/seasonal index of
corresponding quarter] x 100

Example
DESEASONALIZED

2000

2001
2002
2003
2004

Quarter
1
55.14
(45/81.6
0) x 100
58.82
60.09
63.72
73.52

VALUES

Quarte Quarte Quarte

r2
r3
r4
54.57 61.57 58.54

56.59
63.66
65.68
70.74

53.87
59.85
64.13
71.83

54.64
63.42
70.25
64.40

THANK YOU