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CHAPTER 4 CAUSAL FORECASTING WITH REGRESSION TIME SERIES METHODS

SIMPLE LINEAR REGRESSION

We wish to forecast a dependent variable. The value of dependent variable is related to an observable value of one or more independent variables. We call this process causal forecasting, because the value of the dependent variable is often caused by, or at least highly correlated with, the value of the independent variable.

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SIMPLE LINEAR REGRESSION

we minimize the sum of the squared differences between the actual sales and the sales indicated by the model. The difference is the error of the forecast.

SIMPLE LINEAR REGRESSION

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Example

Example

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Example

Example

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Example
If there are 23 housing starts in January of 1996, we would expect to sell about

24.17 +1.83 23 66 fixtures in February.

Coefficient of determination

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Comments on Regression
Regression models are very useful for forecasting when there is a strong relationship and a time lag between the dependent variable and the iindependent variable. If there is no time lag between dependent and independent variables, i.e., they occur in the same time period, we cannot forecast future values of the dependent value unless we use a forecast of the independent variable, which may introduce additional error in the forecast of the dependent variable. If causal relationships do not exist, regression is not the best forecasting method.

Time Series Methods

For short-term forecasting, time series methods are favored. A time series is simply a time-ordered list of historical data, the underlying assumption which is that history is a reasonable predictor of the future. There are several time series models and methods to choose from, including a constant, trend, or seasonal model, depending on the historical data and our understanding of the underlying process.
Constant process
Moving Average Simple Exponential Smoothing

Trend process
Double Exponential Smoothing Double Moving Average (Regression)

Seasonal process
Winters Method

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Constant Process-Last Data Point (LPD)

Constant Process- Average all past data

Given T periods of data, the average at time T is

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Example

Example

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Constant Process- Moving Average

Rather than take an average of all data points, we might choose to average only some of the more recent data. This method, called a moving average, is a compromise between the last data point and average methods. It averages recent data to reduce the effect of random fluctuations.

Constant Process- Moving Average

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Constant Process-Simple Exponential Smoothing

Constant Process-Simple Exponential Smoothing

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Constant Process-Simple Exponential Smoothing

Trend Process-Double Exponential Smoothing

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Trend Process-Double Exponential Smoothing

Trend Process-Double Exponential Smoothing

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Trend Process-Double Exponential Smoothing

Solution:
First, compute the averages of the months 1 to 12, and 13 to 24.

Trend Process-Double Exponential Smoothing

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Trend Process-Double Exponential Smoothing

Trend Process- Other Method

Regression, with time as the independent variable, can be used. Let dt be the demand in period t. T=1,2,..T. T T 1 T td t (T (T + 1) d t 2 t =1 t =1
b= 1 2 1 (T (T + 1)(2T + 1) (T 2 (T + 1) 2 6 4

a=

1 T b d t 2 (T + 1) T t =1

Ft + k = a + bk

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Seasonal Process-Winters Method

Many processes naturally have some number of seasons in a year. If the time periods are weeks, the year would have 52 seasons. Periods of months and quarters have 12 and 4 seasons in a year, respectively. A good model must consider the constant portion of demand, the trend and seasonality.

Seasonal Process-Winters Method

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Seasonal Process-Winters Method

Seasonal Process-Winters Method

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Seasonal Process-Winters Method

Seasonal Process-Winters Method

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Seasonal Process-Winters Method

Seasonal Process-Winters Method

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Seasonal Process-Winters Method

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