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Decomposition methods in forecasting

Decomposition methods in forecasting

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procedure, and forms the starting point for most other methods of time series

decomposition. There are two forms of classical decomposition: an additive

decomposition and a multiplicative decomposition. These are described below for a

time series with seasonal period m (e.g., m = 4 for quarterly data, m = 12 for

monthly data, m = 7 for daily data with a weekly pattern).

year to year. For multiplicative seasonality, the m values that form the seasonal

component are sometimes called the “seasonal indices”.

Additive decomposition

Step 1

If m is an even number, compute the trend-cycle component T^t using a 2 × m-

MA. If m is an odd number, compute the trend-cycle component T^t using an m-

MA.

Step 2

Calculate the detrended series: yt ^ .

− T t

Step 3

To estimate the seasonal component for each season, simply average the

detrended values for that season. For example, with monthly data, the seasonal

component for March is the average of all the detrended March values in the data.

These seasonal component values are then adjusted to ensure that they add to

zero. The seasonal component is obtained by stringing together these monthly

values, and then replicating the sequence for each year of data. This gives S

^

t.

Step 4

The remainder component is calculated by subtracting the estimated seasonal

and trend-cycle components: R

^

t

^

^ − S

= yt − T t t.

Multiplicative decomposition

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03/06/2019 6.3 Classical decomposition | Forecasting: Principles and Practice

replaced by divisions.

Step 1

If m is an even number, compute the trend-cycle component T^t using a 2 × m-

MA. If m is an odd number, compute the trend-cycle component T^t using an m-

MA.

Step 2

Calculate the detrended series: yt /T^t .

Step 3

To estimate the seasonal component for each season, simply average the

detrended values for that season. For example, with monthly data, the seasonal

index for March is the average of all the detrended March values in the data.

These seasonal indexes are then adjusted to ensure that they add to m. The

seasonal component is obtained by stringing together these monthly indexes, and

^

then replicating the sequence for each year of data. This gives S t.

Step 4

The remainder component is calculated by dividing out the estimated seasonal

^ ^

and trend-cycle components: R

^

t = yt /(T t S t ).

Compare this decomposition with that shown in Figure 6.1. The run of remainder

values below 1 in 2009 suggests that there is some “leakage” of the trend-cycle

component into the remainder component. The trend-cycle estimate has over-

smoothed the drop in the data, and the corresponding remainder values have been

affected by the poor trend-cycle estimate.

autoplot() + xlab("Year") +

ggtitle("Classical multiplicative decomposition

of electrical equipment index")

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03/06/2019 6.3 Classical decomposition | Forecasting: Principles and Practice

Figure 6.8: A classical multiplicative decomposition of the new orders index for electrical

equipment.

are now several much better methods. Some of the problems with classical

decomposition are summarised below.

The estimate of the trend-cycle is unavailable for the first few and last few

observations. For example, if m = 12, there is no trend-cycle estimate for the

first six or the last six observations. Consequently, there is also no estimate of

the remainder component for the same time periods.

The trend-cycle estimate tends to over-smooth rapid rises and falls in the data

(as seen in the above example).

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03/06/2019 6.3 Classical decomposition | Forecasting: Principles and Practice

from year to year. For many series, this is a reasonable assumption, but for some

longer series it is not. For example, electricity demand patterns have changed

over time as air conditioning has become more widespread. Specifically, in many

locations, the seasonal usage pattern from several decades ago had its maximum

demand in winter (due to heating), while the current seasonal pattern has its

maximum demand in summer (due to air conditioning). The classical

decomposition methods are unable to capture these seasonal changes over time.

Occasionally, the values of the time series in a small number of periods may be

particularly unusual. For example, the monthly air passenger traffic may be

affected by an industrial dispute, making the traffic during the dispute different

from usual. The classical method is not robust to these kinds of unusual values.

https://otexts.com/fpp2/classical-decomposition.html 4/4

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