STA570/QMT463

TIME SERIES AND FORECASTING II

GROUP ASSIGNMENT
NAME
LAILI FARHANA BINTI IBRAHIM
NUR SYAFIQAH BINTI RAHMAT
NURUL ASHIKIN BINTI ZAKARIA
CLASS

ID NUMBER
2014686566
2014626998
2014853188

S3CS2484B1

LECTURERS NAME : MADAM ISNEWATI BINTI AB MALEK

CONTENTS

B
I
L
1
.
2
.
3
.
4
.
5
.
6
.
7
.

CONTENT

PAGE

INTRODCTION

3-5

RESEARCH OBJECTIVES

DATA DESCRIPTION

METHOD OF ANALYSIS

89

ANALYSIS AND RESULTS

10 11

CONCLUSION

12

APPENDIX

13 - 14

INTRODUCTION
About Ministry of Finance (Malaysia)
The Ministry of Finance is a federal ministry in Malaysia, under the auspices of Malaysias
prime minister, Dato' Sri Haji Mohammad Najib bin Tun Haji Abdul Razak. This ministry is
located at the headquarters in Putrajaya, Malaysia. In addition, Ministry of Finance formed an
established in 31 August 1957 (57 years ago).

Every ministers in the Ministry of Finance and also other Cabinets of Malaysia was appointed
by the Yang di-Pertuan Agong along with advices of the Prime Minister himself. Traditionally,
the post will be held by other than the Prime Minister. However, the portfolio was taken up
by Tun Dr. Mahathir bin Mohamad during his period as the fourth Prime Minister of Malaysia
(1998-1999 and 2001-2003). After that, followed by other Prime Minister namely Tun Haji
Abdullah bin Haji Ahmad Badawi and currently Dato' Sri Haji Mohammad Najib bin Tun Haji
Abdul Razak have followed this trend of taking up the Finance Minister portfolio.

Since Ministry of Finance established, until 1957, Henry Lee Hau Shik was the president of
Ministry of Finance. Followed by Tan Siew Sin (1959-1969), Tun Abdul Razak (1969-1970),
Tan Siew Sin (1970-1974), Hussein Onn (1974-1976), Tengku Razaleigh Hamzah (19761984), Daim Zainuddin (1984-1991), Anwar Ibrahim (1991-1998), Mahathir Mohamad (19981999), Abdullah Ahmad Badawi (2003-2008) and currently held by Najib Razak (2008present).

Under the Ministry of Finance, there are several child agencies. There are Malaysian
Treasury, Bank Negara Malaysia with its main objectives is to issue currency, act as banker
and the advisor of the Malaysias Government, and regulate the country's financial
institutions, credit system and monetary policy. Another child agency they have is the
3

Securities Commission Malaysia that is responsible of regulating and develop capital

markets in Malaysia.

About Federal Government Finance

Federal Government Finance consists of current budget and development expenditure.

Current budget includes revenue, expenditure, surplus and deficit while development
expenditure includes gross development expenditure, loan recoveries and net development
expenditure.

About Net Development Expenditure

Net development expenditure is calculate to enable the government to know the flow of cash
such as expenditures and revenues spend throughout the year. The net development
expenditure is the difference between gross development expenditure and loan recoveries.
For this case project, the observations received from finding the difference between gross
development expenditure and loan recoveries from the year 1996 until 2013.

Figure 1.0: Example of a Net Development Expenditure of Federal Government Finance of

Malaysia

Problem Statement

Without calculating the net development expenditure, government would not know the flow of
cash such as expenditures and revenues spend throughout the year. This act of not
forecasting the future value of net development expenditure may affect the government
policies, strategic goals and plans in the future.

Importance of forecasting

It is important to forecast the net government expenditure so that the government can
evaluate the current and future financial expenditure to guide its policy decision. By using
several models and methods to forecast, it actually is us a way to estimate information based
on past, current and future financial conditions. This may help the government to estimate
the future revenue and expenditure trends that may affect the government policies, strategic
goals and plans. Forecasting is an integral part of the annual budget process. An effective
forecasting may improve the future decision making process.

RESEARCH OBJECTIVES
1. To study the pattern of the underlying structure of the net development expenditure of the
Federal Government Finance of Malaysia as pointed out by the sequence of the
observations in the series.
2. To determine the most suitable mathematical model to fit the data series.
3. To generate the forecast values for net development expenditure.

DATA DESCRIPTION
For the purpose of achieving the objectives as mentioned previously, important data has
been highlighted which is the Net Development Expenditure (RM million) from the Federal
Government Finances information. The total number of observations are 72 which are taken
quarterly from January 1996 until December 2013. The dependent variable involved is the
amount of the Net Development Expenditure and independent variable is the quarterly stated
date as mentioned. In the first stage, the data series have been divided into two parts which
are the estimation part and the evaluation part.
Based on our calculations, the estimation part contains 54 observations, obtained from first
quarter of the year 1996 (January 1996) until second quarter of the year 2008 (April 2008)
and the evaluation part contains 18 observations, obtained from third quarter of the year
2008 (July 2008) until fourth quarter of the year 2013 (October 2013). This evaluation part is
important as it will be used to determine the result of the smallest error between all model
and the best mathematical model to forecast to forecast the future net development
expenditure.
Based on the graph shown below, the pattern shows the trend line as the line keep
increasing and decreasing. The pattern of the graph has a stable movement of increasing
and decreasing as for the year 1996 until the end of year 2005. Starting first quarter of the
year 2006 (January 2006), the line pattern shows that the net development expenditure
experiencing a random shock for a short term memory until the end of 2006 (December
2006). The graph also shows that it has a multiplicative effect.

Figure 1.1: Graph of Net Development Expenditure from 1996-2013

METHOD OF ANALYSIS
Four methods have been purpose to be applied to the data set which are Naive with the
trend model, single exponential smoothing, adaptive response rates exponential smoothing
(ARRES), double exponential smoothing model and holt method. The error measures are
Mean Square error denoted as MSE and Mean Absolute Percentage error denoted as
MAPE.

Naive with Trend Model

Modified to take into account of the trend component overcoming the common problem of
insufficient data which is a common phenomenon in man organization. This model it is highly
sensitive to the change in the actual values, a sudden drop or sharp increase in the values
will severally affect e forecast be fitting the model type will result i the loss of the first two
observation in the series. Using this model, the one-step -ahead forecast made as reference
point T, where T is the last observation of the series, is given as:

Ft+1 = yt (yt / yt -1)

Single Exponential Smoothing Model

Also known as the simple exponential smoothing techniques which requires only one
parameter, the smoothing constant, alpha to generate the fitted vales and hence forecast.
The equation:
Ft+1 = yt + (1-)Ft
Where alpha is the unknown smoothing constant to be determined with values lying between
0 and 1.

10

Double Exponential Smoothing Model

Also known as Browns method. Is useful for the series that exhibits a linear trend
characteristics. This model represent by five equation:
St = yt + (1-)St-1
St = St + (1-)St-1
at = 2St St
bt = (St St)

The one step ahead forecast made at time T is given as:

Ft+m = at + bt m

Holts Method
Called Holts two parameter method frequently used to handle data with linear trend, it not

only smoothed the trend and the slope directly by using different smoothing constant but also
provides more flexibility in selecting the rates at which trend and slopes are tracked. Holts
method utilities 2 parameter in 3 equations as represented below:
St = yt + (1-)(St-1 + Tt-1)
Tt = (St St-1) + (1-) Tt-1
The one step ahead forecast made at T given:
Ft+m = St + Tt m

11

ANALYSIS AND RESULTS

PART A

Figure 1.1: Graph of Net Development Expenditure from 1996-2013

The data used is net development expenditure (RM million) for Malaysia as showed in the graph above.
The data were obtain from the Federal Government Finance Data covering the period from the year 1996
until year 2013.The number of observation used is 72 data that is collected quarterly starting from January
1996 until December 2013 and plotted in figure.
From the graph above, the data of net development expenditure are defined as the dependent variable
plotted on the y-axis, while the year and quarter are plotted on the x-axis that is defined as the independent
variable. The method used to identify the trend is by plotting a straight line or trend line through the points
on the graph and the equation derived from the linear trend line is y=130.12x+3556.4
The graph shows increasing and decreasing movement starting from the year 1996 as it starting to increase
at the early of January 1997 and decrease back at the end of the year. The pattern of the graph is normal
until it reached at the end of the year 2006, where there are irregularities in trend estimation. There is
occurrence of the random shock for a short period memory on the year 2006 as the value from 2,017 at the
1st quarter increased extremely to 19,032 at the end of 4th quarter, which affects the trend. The levels of
patterns later return to normal within a short period of time.

12

ERROR MEASURE/
MODEL

ESTIMATION
PART

EVALUATION
PART

MSE

MAPE

MSE

MAPE

Nave With Trend Model

156,707,514.03

254.31

116,853,828.90

1017.24

Single Exponential Model

17,582,272.33

53.41

20,757,187.81

34.32

Double Exponential Model

17,137,094.06

51.56

20,426,478.61

31.7

Holt's Method

17271928.32

50.06

20,878,430.33

32.07

PART B:

From the tabulation of the data above, we have calculated for two different part which are
estimation part and evaluation part which is from each part we calculated the value of MSE
and MAPE. Four model are involved which is firstly Naive with the Trend model where the
MSE for estimation art and evaluation part is 156,707,514.03 and 116,853,828.90
respectively. Whereas the value of MAPE for both data estimation and evaluation part is
254.31 and 1017.24.
Secondly, for the second model Single Exponential Model, the value of MSE are
17,582,272.33 and 20,757,187.81 for the estimation part and evaluation part. Whereas the
value of MAPE are 53.41 and 34.32 for estimation part and evaluation part respectively. The
value of alpha, which is the best parameter for the smoothing constant is 0.15.
Thirdly, Double Exponential Model, the value of MSE for the estimation part and evaluation
part is 17137094.06 and 20426478.61. MAPE for both estimation and evaluation part is
51.56 and 31.7. The best parameter of smoothing constant is 0.06.
Lastly, for the Holts method, the value of the MSE is 17271928.32 and 20,878,430.33 for the
estimation and the evaluation part respectively. Whereas the value of the MAPE are 50.06
and 32.07 for th3 estimation and evaluation part. The best parameter of smoothing constant
alpha, is 0.15 and beta, is 0.02.
Among all these model that has been proposed, we found out the Double Exponential
Smoothing Model is the best model to forecast the value of net development expenditure as
it stand for the lowest value of MSE and MAPE.

13

CONCLUSION
From this study, we can conclude a few things. Firstly, we able to identify the Net
development expenditure which is enable the government to know the flow of cash such as
expenditures and revenues spend throughout the year. The net development expenditure is
the difference between gross development expenditure and loan recoveries. For this case
project, the observations received from finding the difference between gross development
expenditure and loan recoveries from the year 1996 until 2013.

The four method has been proposed to be applied to the data set which is Naive with Trend
Model, Single Exponential Model, Double Exponential Model and Holts Model however
starting first quarter of the year 2006 (January 2006), the line pattern shows that the net
development expenditure experiencing a random shock for a short term memory until the
end of 2006 (December 2006). The graph also shows that it has a multiplicative effect. Thus
Adaptive Response Rates Exponential Smoothing Model (ARRES) need to be applied to the
actual model. The error measures used are MEAN SQUARE ERROR denoted as MSE and
MEAN ABSOLUTE PERCENTAGE ERROR denoted as MAPE.

After using the four model, we able to determine the most suitable mathematical model to fit
the data series which is Double Exponential Smoothing Model with the lowest MSE
17,137,094.06.

14

APPENDIX
NET DEVELOPMENT EXPENDITURE DATA

YEAR
1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

QUARTER
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q

NET DEVELOPMENT
EXPENDITURE
1,182
1,639
4,051
5,728
1,544
3,255
3,066
6,580
1,174
2,405
3,585
9,964
873
5,317
7,487
7,785
2,415
5,528
5,336
11,753
4,958
5,545
7,173
16,556
3,713
7,993
8,747
14,616
7,775
8,954
7,836
13,746
4,787
7,043
6,167
9,520
2,620

15

2006

2007

2008

2009

2010

2011

2012

2013

2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q

5,889
4,193
14,583
2,017
5,025
8,886
19,032
5,169
5,805
10,707
15,779
5,194
8,931
12,106
15,658
8,164
12,072
11,458
17,303
7,016
12,010
12,358
19,912
6,321
8,235
12,272
18,507
8,120
8,793
10,800
16,613
8,797
6,827
9,015
16,044

16