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Forecasting Time Series
My Introduction Name: Bharani Kumar Educa+on: IIT Hyderabad Indian School of Business Professional cer+fica+ons: PMP Project Management Professional
PMI-ACP PMI-RMP CSM LSSGB LSSBB SSMBB ITIL Agile PM
Agile Cer4fied Prac44oner Risk Management Professional Cer4fied Scrum Master Lean Six Sigma Green Belt Lean Six Sigma Black Belt Six Sigma Master Black Belt Informa4on Technology Infrastructure Library Dynamic System Development Methodology Atern © 2013 ExcelR Solutions. All Rights Reserved
My Introduction
1
2
3
4
DATA SCIENTIST
RESEARCH in ANALYTICS, DEEP LEARNING & IOT
DeloiHe Driven using US policies Infosys Driven using Indian policies under Large enterprises ITC Infotech Driven using Indian policies SME
HSBC Driven using UK policies © 2013 ExcelR Solutions. All Rights Reserved
AGENDA Why Forecas4ng Learn about the various examples of forecasHng Forecas4ng Strategy
EDA & Graphical Representa4on Forecas4ng Decomposi4on components
Why ng? Forecas4
Forecas4ng Strategy Learn about decomposing, forecasHng & combining EDA & Graphical Representa4on Learn about exploratory data analysis, scaKer plot, Hme plot, lag plot, ACF plot Forecas4ng components Learn about Level, Trend, Seasonal, Cyclical, Random components
AGENDA
Forecas4ng Models & Errors Learn about various forecasHng models to be discussed & the various error measures
Why Forecasting • •
Why forecast, when you would know the outcome eventually? Early knowledge is the key, even if that knowledge is imperfect – For seQng producHon schedules, one needs to forecast sales – For staffing of call centers, a company needs to forecast the demand for service – For dealing with epidemic emergencies, naHons should forecast the various flu
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Types of forecast
Short Term or Long Term
Micro Scale or Macro Scale
Point Forecast
Forecas4ng Classifica4on Qualita4ve or Quan4ta4ve Data or Judgment
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Density Forecast Interval Forecast
Who generates Forecast?
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Who generates Forecast?
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Time series vs Cross-sectional data
01
Cross-sec4onal Data
02 Time Series Data © 2013 ExcelR Solutions. All Rights Reserved
Dataset for further discussion
Month
Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92
Monthly FooWalls of customers from Jan 1991 to March 2004
Footfall in thousands 1709 1621 1973 1812 1975 1862 1940 2013 1596 1725 1676 1814 1615 1557 1891 1956 1885 1623
t = 1, 2, 3,…....= Hme period index Yt = value of the series at Hme period t Yt+k = forecast for Hme period t+k, given data unHl Hme t et = forecast error for period t
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Forecasting Strategy 01 02 03 04 05 06 07 08
Define Goal Data Collec4on Explore & Visualize Series Pre-Process Data Par44on Series Apply Forecas4ng Method(s) Evaluate & Compare Performance Implement Forecasts / System © 2013 ExcelR Solutions. All Rights Reserved
Forecasting Strategy – Step 1 #1 Is the goal descriptive or predictive?
#2 What is the forecast horizon?
• DescripHve = Time Series Analysis
• How far into the future? k in Yt+k • Rolling forward or at single Hme point?
• PredicHve = Time Series ForecasHng #3 How will the forecast be used?
• Who are the stakeholders? • Numerical or event forecast? • Cost of over-predicHon & under-predicHon
Define Goal
#4 Forecasting expertise & automation
• In-house forecasHng or consultants? • How many series? How ofen? • Data & sofware availability
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Forecasting Strategy – Step 2 #1 Data Quality
#2 Temporal Frequency
• Typically small sample, so need good quality
• Should we use real-Hme Hcket collecHon data?
• Data same as series to be forecasted
• Balance between signal & noise • AggregaHon / DisaggregaHon
Data Collec-on #4. Domain exper4se
#3 Series Granularity? • Coverage of the data – Geographical, populaHon, Hme,… • Should be aligned with goal
• Necessary informaHon source • Affects modeling process from start to end • Level of communicaHon/ coordinaHon between forecasters & domain experts
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Forecasting Strategy Step3 (Explore Series) Season al Addi4ve: PaHern s Yt = Level + Trend + Seasonality + Noise
Level
SYSTEMATIC PART
Trend Seasonal PaHerns
Mul4plica4ve: Yt = Level x Trend x Seasonality x Noise
NON-SYSTEMATIC PART Noise
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Trend Component • • • •
Persistent, overall upward or downward paKern Due to populaHon, technology etc. Overall Upward or Downward Movement Several years duraHon
Response
Mo., Qtr., Yr.
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Seasonal Component • • • •
Regular paKern of up & down fluctuaHons Due to weather, customs etc. Occurs within one year Example: Passenger traffic during 24 hours
Summer Response
Mo., Qtr. © 2013 ExcelR Solutions. All Rights Reserved
Irregular/Random/Noise Component • ErraHc, unsystemaHc, ‘residual’ fluctuaHons • Due to random variaHon or unforeseen events – Union strike – War • Short duraHon & nonrepeaHng
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Time Series Components
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Time Plot • Plots a variable against Hme index • Appropriate for visualizing serially collected data (Hme series) • Brings out many useful aspects of the structure of the data • Example: Electrical usage for Washington Water Power (Quarterly data from 1980 to 1991)
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Time plot Electrical power usage for Washington Water Power: 1980-1991 Power usage (KilowaHs)
1100 1000 900 800 700 600 500 400 1980
1982
1984
1986 Year
1988
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1990
Observations • There is a cyclic trend • Maximum demand in first quarter; minimum in third quarter • There may also be a slowly increasing trend (to be examined) • Any reasonable forecast should have cyclic fluctuaHons • Trend (if any) need to be uHlized for forecasHng • Forecast would not be exact – there would be some error © 2013 ExcelR Solutions. All Rights Reserved
Time plot
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Quarterly Sales of Ice-cream
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Scatter Diagram • Plots one variable against another • One of the simplest tools for visualizaHon
Example: Maintenance cost and Age for nine buses (Spokane Transit)
This is an example of cross-secHonal data (observaHons collected in a single point of Hme)
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Cost 859 682 471 708 1094 224 320 651 1049
Age 8 5 3 9 11 2 1 8 12
Yearly cost of maintenance (US $)
Scatter Plot 1200 1000 800 600 400 200 0 0
2
4
6
8
Age of bus
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10
12
14
Observations • Older buses have higher cost of maintenance • There is some variaHon (case to case) • The rise in cost is about $ 80 per year of age • It may be possible to use ‘age’ to forecast maintenance cost • Forecast would not be a ‘certain’ predicHon – there would be some error © 2013 ExcelR Solutions. All Rights Reserved
Lag plot • Plots a variable against its own lagged sample • Brings out possible associaHon between successive samples • Example: Monthly sale of VCRs by a music store in a year = Number of VCRs sold in Hme period t = Number of VCRs sold in Hme period t – k © 2013 ExcelR Solutions. All Rights Reserved
Example of lagged variables Number of VCRs sold in a month Time 1 2 3 4 5 6 7 8 9 10 11 12
Original 123 130 125 138 145 142 141 146 147 157 150 160
Lagged one step 123 130 125 138 145 142 141 146 147 157 150 © 2013 ExcelR Solutions. All Rights Reserved
Lagged two steps 123 130 125 138 145 142 141 146 147 157
Lag plot (k = 1) ScaHer plot of VCR sales with 1-step lagged VCR sales 160 155 150 145 140 135 130 125 120 120
125
130
135
140
145
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150
155
160
Observations • There is a reasonable degree of associaHon between the original variable and the lagged one • Value of lagged variable is known beforehand, so it is useful for predicHon • AssociaHon between original and lagged variable may be quan+fied through a correlaHon © 2013 ExcelR Solutions. All Rights Reserved
Autocorrelation • CorrelaHon between a variable and its lagged version (one Hme-step or more)
= ObservaHon in Hme period t = ObservaHon in Hme period t – k = Mean of the values of the series = AutocorrelaHon coefficient for k-step lag
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Standard error of rk • The standard error is The standard error of the mean esHmates the variability between samples whereas the standard deviaHon measures the variability within a single sample.
• Increases progressively with k, but eventually reaches a maximum value • If the ‘true’ autocorrelaHon is 0, then the esHmate rk should be in the interval (– 2SE(rk), 2SE(rk)) 95% of the Hme • SomeHmes SE(rk) is approximated by © 2013 ExcelR Solutions. All Rights Reserved
Correlogram or ACF plot • Plots the ACF or AutocorrelaHon funcHon (rk) against the lag (k) • Plus-and-minus two-standard errors are displayed as limits to be exceeded for staHsHcal significance • Reveals lagged variables that can be potenHally useful for forecasHng © 2013 ExcelR Solutions. All Rights Reserved
Correlogram for VCR data
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ACF plot for electricity usage data
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Observations • Every alternate sample is large, many of them staHsHcally significant also • ACFs at lags 4, 8, 12, etc are posiHve • ACF at lags 2,6,10 etc are negaHve • All these pick up the seasonal aspect of the data • The data may be re-examined afer ‘removing’ seasonality © 2013 ExcelR Solutions. All Rights Reserved
ACF of de-seasoned KW data
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Observations • De-seasoned series has small ACFs • This part of the data has liKle forecasHng value
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Typical questions in exploratory analysis Is there a TREND?
All the plots contain informaHon regarding these quesHons
Is there a SEASONALITY?
Are the data RANDOM?
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Time series plots
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Effect of omission of data on the Time series plot
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Effect of omission of data on the Time series plot
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0
0
20
20
y 40
y 40
60
60
80
80
Confusing kind of trend due to other type of scaling
5
10 t
15
20
0
5
10 t
15
20
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1
0
1
Log t
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2.5
2.5
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Log y 3.5 4
Log y 3 3.5 4
4.5
4.5
0
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Log t
Few points on Plots Plot helps us to summarize & reveal paKerns in data Graphics help us to idenHfy anomalies in data Plot helps us to present a huge amount of data in small space & makes huge data set coherent To get all the advantages of plot, the “Aspect RaHo” of plot is very crucial The raHo of Height to Width of a plot is called the ASPECT RATIO
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Aspect Ratio • Generally aspect raHo should be around 0.618 • However, for long Hme series data aspect raHo should be around 0.25. To understand the impact of aspect raHo see the two plots in the next two slides
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Aspect ratio
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Aspect ratio
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Preliminaries for Step 3 of 8-Step forecasting strategy
?
Should we use all historical data for forecas4ng
Training Data Valida4on Data
Solu4on = DATA PARTIONING
Fit the model only to TRAINING period Assess performance on VALIDATION period
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Partitioning
Deploy model by joining Training + ValidaHon to forecast the Future © 2013 ExcelR Solutions. All Rights Reserved
How to choose a Validation Period? Forecast Horizon
Seasonality
Strategy to choose Valida4on Data Period Length of series
Underlying condi4ons affec4ng series © 2013 ExcelR Solutions. All Rights Reserved
Rolling-forward forecasts
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NAÏVE Forecasts Forecast method: Last sample k-step ahead Seasonal series ( M series )
Ft+k = Yt Ft+k = Yt-M+k
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Forecast error • Forecast error is • If model is adequate, forecast error should contain no informaHon • Plots of et should resemble that of ‘white noise’ or uncorrelated random numbers with 0 mean and constant variance (There should be NO PATTERN)
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Forecast error • Forecast error can follow different distribuHons based on business context
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Forecasting Errors
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Evaluating Predictive Accuracy • Mean error • Mean absolute deviation • Mean squared error • Root mean squared error • Mean percentage error • Mean absolute percentage error © 2013 ExcelR Solutions. All Rights Reserved
Typical plots of ‘White noise’ Time plot
Lag plot ACF plot
Histogram © 2013 ExcelR Solutions. All Rights Reserved
Mean error (ME) • If the ME is around zero, forecasts are called unbiased. Model is unbiased to overestimation or the underestimation. Certainly this is a desirable property of a model Actual data
Forecast based on Model 1
Error from model 1
Forecast based on Model 2
Error from model 2
100
101
1
110
10
200
199
-1
190
-10
300
301
1
310
10
400
399
-1
390
-10
ME
0 © 2013 ExcelR Solutions. All Rights Reserved
0
Mean error • Mean error has the disadvantage that small amount and large amount of error may have same effect • To overcome this problem we may define two different forecast performance measure • 1. Mean Absolute DeviaHon:
• 2. Mean Square Error: © 2013 ExcelR Solutions. All Rights Reserved
MAD & MSE Actual data 100
Forecast based on Model 1 101
Error from model 1 1
Forecast based on Model 2 110
Error from model 2 10
200
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-1
190
-10
300
301
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310
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400
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-1
390
-10
MAD
1
10
MSE
1
100
ME
0
0
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Problem with ME, MAD, MSE • All these three measures are not unit free and also not scale free • Just think of a case that one is forecasHng sales figures. Someone in India using rupee figure, and somebody else in USA is expressing the same sales figure in dollar. Both are using the same model. However forecast measure will differ. This is a very awkward situaHon • MSE has the added disadvantage that its unit is in square. RMSE does not have this added disadvantage • So we need unit free measure © 2013 ExcelR Solutions. All Rights Reserved
MPE and MAPE---Unit free measure
• Both expressed in percentage form • Both are unit free © 2013 ExcelR Solutions. All Rights Reserved
Last Sample: Number of customers requiring repair work Customers Fitted value Residual Y_t e_t 58 54 58 -4 60 54 6 55 60 -5 62 55 7 62 62 0 65 62 3 63 65 -2 70 63 7 MAD 4.25
|e_t|
e_t^2
e_t/Y_t
|e_t/Y_t|
4 6 5 7 0 3 2 7 MSE 23.5
16 36 25 49 0 9 4 49 RMSE 4.85
-0.07407 0.1 -0.09091 0.112903 0 0.046154 -0.03175 0.1 MPE 0.0203
0.074074 0.1 0.090909 0.112903 0 0.046154 0.031746 0.1 MAPE 0.0695
Forecast method: Last sample © 2013 ExcelR Solutions. All Rights Reserved
MA: Number of customers requiring repair work Customers Y_t 58 54 60 55 62 62 65 63 70
Fitted value
Residual e_t
|e_t|
e_t^2
e_t/Y_t
|e_t/Y_t|
57.3333 56.3333 59.0000 59.6667 63.0000 63.3333
-2.3333 5.6667 3.0000 5.3333 0.0000 6.6667 MAD 3.83
2.3333 5.6667 3.0000 5.3333 0.0000 6.6667 MSE 19.91
5.4444 32.1111 9.0000 28.4444 0.0000 44.4444 RMSE 4.46
-0.0424 0.0914 0.0484 0.0821 0.0000 0.0952 MPE 0.0458
0.0424 0.0914 0.0484 0.0821 0.0000 0.0952 MAPE 0.0599
Forecast method: 3-point moving average © 2013 ExcelR Solutions. All Rights Reserved
Challenges
Zero Counts Missing values Compute average metrics Exclude missing values
MAE/RMSE: no problem Cannot compute MAPE Exclude Zero count Use alternate measure - MASE
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Forecast / Prediction Interval
1 2 3
Probability of 95% that the value will be in the range [a,b] If the forecast errors are normal, predic4on interval is σ = es4mated standard devia4on of forecast errors k = some mul4ple (k=2 corresponds to 95% probability)
Challenges to formula
• Errors ofen non-normal • If model is biased (over/under-forecasts), symmetric interval around Ft+k? • EsHmaHng the error standard deviaHon is tricky One soluHon is transforming errors to normal
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Forecast / Prediction Interval – Non-Normal To construct predicHon interval for 1-step-ahead forecasts 1. Create roll-forward forecasts (Ft+1) on validaHon period 2. Compute forecast errors 3. Compute percenHles of error distribuHon (e(5)=5th percenHle; e(95)=95th percenHle) 4. PredicHon interval: [ Ft+1 + e(5) , Ft+1 + e(95) ] In Excel =percen+le 5th percenHle = -307.0 95th percenHle = 292.8 95% predicHon interval for 1-step ahead forecast Ft+1: [Ft+1 – 307 , Ft+1 + 292.8] © 2013 ExcelR Solutions. All Rights Reserved
Forecasting Different Methods
• • • • •
Linear regression Autoregressive models ARIMA LogisHc regression Econometric models
Model based
Data driven
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• Naïve forecasts • Smoothing • Neural nets
Forecasting Different Methods Linear Model: Yt = βo + β1t + ε ExponenHal Model: Log (Yt) = βo + β1t + ε QuadraHc Model: Yt = βo + β1t + β2t2 + ε AddiHve Seasonality: Yt = βo + β1DJan + β2DFeb + β3DMar + …...+ β11DNov + ε AddiHve Seasonality with QuadraHc Trend: Yt = βo + β1t + β2t2 + β3DJan + β4DFeb + β5DMar + …...+ β13DNov + ε MulHplicaHve Seasonality: Log (Yt) = βo + β1DJan + β2DFeb + β3DMar + …...+ β11DNov + ε © 2013 ExcelR Solutions. All Rights Reserved
Irregular Component Irregular Components
Solutions
• Outliers
• Remove unusual periods from the model
• Special Events • Model separately • Interventions • Keep in the model, using dummy variable © 2013 ExcelR Solutions. All Rights Reserved
External Information ForecasHng Airline Ticket Price
ForecasHng Internet Sales
Fuel price impacts the airline Hcket
Amount spend in adverHsements
Airfaret = b0 + b1 (Petrol Price)t + e Must be forecasted
Sales(t) = g{ f(sales(t-1, t-2, ... , t-6), a1*SQRT[AdSpend(t-1)] + ... + a6*SQRT[AdSpend(t-6)] }
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Linear Regression for forecasting
1
2
Global Trend
Seasonality
• Linear Trend (constant growth) • ExponenHal Trend (% growth)
• AddiHve (Y) • MulHplicaHve log(Y)
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3 Irregular PaHerns
Autoregressive (AR) Models • AR model is used to forecast errors • AR model captures autocorrelaHon directly • AutocorrelaHon measures how strong the values of a Hme series are related to their own past values • Lag(1) autocorrelaHon = correlaHon between (y1, y2, …, yt-1 ) and (y2,y3,…, yt) • Lag(k) autocorrelaHon = correlaHon between (y1, y2, …, yt-k) and (yk+1,yk+2,…,yt) © 2013 ExcelR Solutions. All Rights Reserved
Autocorrelation & its uses Check forecast errors for independence
Model remaining information
Evaluate predictability © 2013 ExcelR Solutions. All Rights Reserved
Autoregressive Model • MulH-layer model • Model the forecast errors, by treaHng them as a Hme series • Then examine autocorrelaHon of “errors of forecast errors” ? ü If autocorrelaHon exists, fit an AR model to the forecast errors series ü If autocorrelated, conHnue modeling the level-2 errors (not pracHcal) • AR model can also be used to model original data Yt = α + β1Yt-1 + β2Yt-2 + εt -> AR(2), order = 2 1-step ahead forecast: Ft+1 = α + β1Yt + β2Yt-1 2-steps ahead: Ft+2 = α + β1Ft+1 + β2Yt 3-steps ahead: Ft+3 = α + β1Ft+2 + β2Ft+1 © 2013 ExcelR Solutions. All Rights Reserved
Autoregressive Model • Use level 1 to forecast next value of series Ft+1 ^
• Use AR to forecast next forecast error (residual) Et+1 • Combine the two to get an improved forecast F*t+1 ^ F*t+1 = Ft+1 + Et+1
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Random Walk • Specific case of AR(1) model • If β1 = 1 in AR(1) model then it is called as Random Walk • EquaHon will be Yt = a + Yt-1 + εt a = drif parameter σ(std of ε) = volaHlity
• Changes from one period to the next are random • How to find out whether there in random walk to not in the data? • Run AR(1) model & check for the value of β1 • Do a differenced series and run ACF plot • How to esHmate drif & volaHlity? © 2013 ExcelR Solutions. All Rights Reserved
Random Walk • One-step-ahead forecast: Ft+1 = a + Yt • Two-step-ahead forecast: Ft+2 = a + Yt+1= 2a + Yt • k-step-ahead forecast : Ft+k = ka + Yt • If the drif parameter is 0, then the k-step-ahead forecast is Ft+k = Yt for all k
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Model based approaches & drawbacks
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Model vs Data based approaches Model Based Approach
01
Past is SIMILAR to Future
Data Based Approach
02
Past is NOT SIMILAR to Future © 2013 ExcelR Solutions. All Rights Reserved
Forecast methods based on smoothing There are two major forecasHng techniques based on smoothing • Success depends on choosing window width • Balance between over & under smoothing
– Moving averages
– ExponenHal smoothing
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Smoothing – Moving Average Smoothing Noise
ForecasHng
4 uses
• •
Forecast future points by using an average of several past points More suitable for series with no Trend & no seasonality
Data VisualizaHon
• •
Removing Seasonality & CompuHng seasonal indexes © 2013 ExcelR Solutions. All Rights Reserved
A Hme-plot of the MA reveals the Level & Trend of a series It filters out the seasonal & random components
Moving Average - Calculations Trailing Moving Average It is calculated based on a window from Hme ‘t’ & backwards
Centered Moving Average It is calculated based on a window centered around Hme ‘t’ 6000 5250
3750 3000 2250
Q
186 386 Q 18 Q 7 387 Q 18 Q 8 38 Q 8 189 Q 38 Q 9 190 Q 39 Q 0 19 Q 1 391 Q 19 Q 2 39 Q 2 193 Q 39 Q 3 194 Q 39 Q 4 19 Q 5 395 Q 196
1500
Q
Sales
4500
Quarter
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Calculation – Trailing MA 1.
Choose window width (W)
2.
For MA at Hme t, place window on Hme points t-W+1,…,t
W=5 t-3 t-2
t-4 3.
t-1
t
Compute average of values in the window:
MAt =
yt −W +1 + yt −W + 2 + ! + yt −1 + yt W
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Calculation – Centered MA Compute average of values in window (of width W), which is centered at t Odd width: center window on Hme t and average the values in the window Even width: take the two “almost centered” windows and average the values in them
W=4
W=4 t-2
W=5 t-1 t t+1
⎛yyt − 2++yyt −1++yyt++yyt +1+ y⎞ t −1 t t +1 + ⎟t + 2 MAt =⎜ t −2 4 ⎟/2 5 MAt = ⎜ ⎜ yt −1 + yt + yt +1 + yt + 2 ⎟ ⎜ ⎟ 4 ⎝ ⎠
t+2
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Moving Average Hands On
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Exponential Smoothing Simple Exponen4al Smoothing • No Trend • No Seasonality • Level • Noise (cannot be modeled)
Holt’s method • Also called double exponenHal • Trend • No Seasonality
Winter’s method
• Assigns more weight to most recent observaHons
• Trend • Seasonality • Variants are possible
• Assigns less weight to farthest observaHons
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Simple Exponential Smoothing Forecasts = es+mated level at most recent Hme point: Ft+k = Lt AdapHve algorithm: adjusts most recent forecast (or level) based on the actual data:
Lt = αYt + (1-α) Lt-1
α = the smoothing constant (0
My Introduction Name: Bharani Kumar Educa+on: IIT Hyderabad Indian School of Business Professional cer+fica+ons: PMP Project Management Professional
PMI-ACP PMI-RMP CSM LSSGB LSSBB SSMBB ITIL Agile PM
Agile Cer4fied Prac44oner Risk Management Professional Cer4fied Scrum Master Lean Six Sigma Green Belt Lean Six Sigma Black Belt Six Sigma Master Black Belt Informa4on Technology Infrastructure Library Dynamic System Development Methodology Atern © 2013 ExcelR Solutions. All Rights Reserved
My Introduction
1
2
3
4
DATA SCIENTIST
RESEARCH in ANALYTICS, DEEP LEARNING & IOT
DeloiHe Driven using US policies Infosys Driven using Indian policies under Large enterprises ITC Infotech Driven using Indian policies SME
HSBC Driven using UK policies © 2013 ExcelR Solutions. All Rights Reserved
AGENDA Why Forecas4ng Learn about the various examples of forecasHng Forecas4ng Strategy
EDA & Graphical Representa4on Forecas4ng Decomposi4on components
Why ng? Forecas4
Forecas4ng Strategy Learn about decomposing, forecasHng & combining EDA & Graphical Representa4on Learn about exploratory data analysis, scaKer plot, Hme plot, lag plot, ACF plot Forecas4ng components Learn about Level, Trend, Seasonal, Cyclical, Random components
AGENDA
Forecas4ng Models & Errors Learn about various forecasHng models to be discussed & the various error measures
Why Forecasting • •
Why forecast, when you would know the outcome eventually? Early knowledge is the key, even if that knowledge is imperfect – For seQng producHon schedules, one needs to forecast sales – For staffing of call centers, a company needs to forecast the demand for service – For dealing with epidemic emergencies, naHons should forecast the various flu
© 2013 ExcelR Solutions. All Rights Reserved
Types of forecast
Short Term or Long Term
Micro Scale or Macro Scale
Point Forecast
Forecas4ng Classifica4on Qualita4ve or Quan4ta4ve Data or Judgment
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Density Forecast Interval Forecast
Who generates Forecast?
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Who generates Forecast?
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Time series vs Cross-sectional data
01
Cross-sec4onal Data
02 Time Series Data © 2013 ExcelR Solutions. All Rights Reserved
Dataset for further discussion
Month
Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92
Monthly FooWalls of customers from Jan 1991 to March 2004
Footfall in thousands 1709 1621 1973 1812 1975 1862 1940 2013 1596 1725 1676 1814 1615 1557 1891 1956 1885 1623
t = 1, 2, 3,…....= Hme period index Yt = value of the series at Hme period t Yt+k = forecast for Hme period t+k, given data unHl Hme t et = forecast error for period t
© 2013 ExcelR Solutions. All Rights Reserved
Forecasting Strategy 01 02 03 04 05 06 07 08
Define Goal Data Collec4on Explore & Visualize Series Pre-Process Data Par44on Series Apply Forecas4ng Method(s) Evaluate & Compare Performance Implement Forecasts / System © 2013 ExcelR Solutions. All Rights Reserved
Forecasting Strategy – Step 1 #1 Is the goal descriptive or predictive?
#2 What is the forecast horizon?
• DescripHve = Time Series Analysis
• How far into the future? k in Yt+k • Rolling forward or at single Hme point?
• PredicHve = Time Series ForecasHng #3 How will the forecast be used?
• Who are the stakeholders? • Numerical or event forecast? • Cost of over-predicHon & under-predicHon
Define Goal
#4 Forecasting expertise & automation
• In-house forecasHng or consultants? • How many series? How ofen? • Data & sofware availability
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Forecasting Strategy – Step 2 #1 Data Quality
#2 Temporal Frequency
• Typically small sample, so need good quality
• Should we use real-Hme Hcket collecHon data?
• Data same as series to be forecasted
• Balance between signal & noise • AggregaHon / DisaggregaHon
Data Collec-on #4. Domain exper4se
#3 Series Granularity? • Coverage of the data – Geographical, populaHon, Hme,… • Should be aligned with goal
• Necessary informaHon source • Affects modeling process from start to end • Level of communicaHon/ coordinaHon between forecasters & domain experts
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Forecasting Strategy Step3 (Explore Series) Season al Addi4ve: PaHern s Yt = Level + Trend + Seasonality + Noise
Level
SYSTEMATIC PART
Trend Seasonal PaHerns
Mul4plica4ve: Yt = Level x Trend x Seasonality x Noise
NON-SYSTEMATIC PART Noise
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Trend Component • • • •
Persistent, overall upward or downward paKern Due to populaHon, technology etc. Overall Upward or Downward Movement Several years duraHon
Response
Mo., Qtr., Yr.
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Seasonal Component • • • •
Regular paKern of up & down fluctuaHons Due to weather, customs etc. Occurs within one year Example: Passenger traffic during 24 hours
Summer Response
Mo., Qtr. © 2013 ExcelR Solutions. All Rights Reserved
Irregular/Random/Noise Component • ErraHc, unsystemaHc, ‘residual’ fluctuaHons • Due to random variaHon or unforeseen events – Union strike – War • Short duraHon & nonrepeaHng
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Time Series Components
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Time Plot • Plots a variable against Hme index • Appropriate for visualizing serially collected data (Hme series) • Brings out many useful aspects of the structure of the data • Example: Electrical usage for Washington Water Power (Quarterly data from 1980 to 1991)
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Time plot Electrical power usage for Washington Water Power: 1980-1991 Power usage (KilowaHs)
1100 1000 900 800 700 600 500 400 1980
1982
1984
1986 Year
1988
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1990
Observations • There is a cyclic trend • Maximum demand in first quarter; minimum in third quarter • There may also be a slowly increasing trend (to be examined) • Any reasonable forecast should have cyclic fluctuaHons • Trend (if any) need to be uHlized for forecasHng • Forecast would not be exact – there would be some error © 2013 ExcelR Solutions. All Rights Reserved
Time plot
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Quarterly Sales of Ice-cream
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Scatter Diagram • Plots one variable against another • One of the simplest tools for visualizaHon
Example: Maintenance cost and Age for nine buses (Spokane Transit)
This is an example of cross-secHonal data (observaHons collected in a single point of Hme)
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Cost 859 682 471 708 1094 224 320 651 1049
Age 8 5 3 9 11 2 1 8 12
Yearly cost of maintenance (US $)
Scatter Plot 1200 1000 800 600 400 200 0 0
2
4
6
8
Age of bus
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10
12
14
Observations • Older buses have higher cost of maintenance • There is some variaHon (case to case) • The rise in cost is about $ 80 per year of age • It may be possible to use ‘age’ to forecast maintenance cost • Forecast would not be a ‘certain’ predicHon – there would be some error © 2013 ExcelR Solutions. All Rights Reserved
Lag plot • Plots a variable against its own lagged sample • Brings out possible associaHon between successive samples • Example: Monthly sale of VCRs by a music store in a year = Number of VCRs sold in Hme period t = Number of VCRs sold in Hme period t – k © 2013 ExcelR Solutions. All Rights Reserved
Example of lagged variables Number of VCRs sold in a month Time 1 2 3 4 5 6 7 8 9 10 11 12
Original 123 130 125 138 145 142 141 146 147 157 150 160
Lagged one step 123 130 125 138 145 142 141 146 147 157 150 © 2013 ExcelR Solutions. All Rights Reserved
Lagged two steps 123 130 125 138 145 142 141 146 147 157
Lag plot (k = 1) ScaHer plot of VCR sales with 1-step lagged VCR sales 160 155 150 145 140 135 130 125 120 120
125
130
135
140
145
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150
155
160
Observations • There is a reasonable degree of associaHon between the original variable and the lagged one • Value of lagged variable is known beforehand, so it is useful for predicHon • AssociaHon between original and lagged variable may be quan+fied through a correlaHon © 2013 ExcelR Solutions. All Rights Reserved
Autocorrelation • CorrelaHon between a variable and its lagged version (one Hme-step or more)
= ObservaHon in Hme period t = ObservaHon in Hme period t – k = Mean of the values of the series = AutocorrelaHon coefficient for k-step lag
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Standard error of rk • The standard error is The standard error of the mean esHmates the variability between samples whereas the standard deviaHon measures the variability within a single sample.
• Increases progressively with k, but eventually reaches a maximum value • If the ‘true’ autocorrelaHon is 0, then the esHmate rk should be in the interval (– 2SE(rk), 2SE(rk)) 95% of the Hme • SomeHmes SE(rk) is approximated by © 2013 ExcelR Solutions. All Rights Reserved
Correlogram or ACF plot • Plots the ACF or AutocorrelaHon funcHon (rk) against the lag (k) • Plus-and-minus two-standard errors are displayed as limits to be exceeded for staHsHcal significance • Reveals lagged variables that can be potenHally useful for forecasHng © 2013 ExcelR Solutions. All Rights Reserved
Correlogram for VCR data
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ACF plot for electricity usage data
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Observations • Every alternate sample is large, many of them staHsHcally significant also • ACFs at lags 4, 8, 12, etc are posiHve • ACF at lags 2,6,10 etc are negaHve • All these pick up the seasonal aspect of the data • The data may be re-examined afer ‘removing’ seasonality © 2013 ExcelR Solutions. All Rights Reserved
ACF of de-seasoned KW data
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Observations • De-seasoned series has small ACFs • This part of the data has liKle forecasHng value
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Typical questions in exploratory analysis Is there a TREND?
All the plots contain informaHon regarding these quesHons
Is there a SEASONALITY?
Are the data RANDOM?
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Time series plots
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Effect of omission of data on the Time series plot
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Effect of omission of data on the Time series plot
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0
0
20
20
y 40
y 40
60
60
80
80
Confusing kind of trend due to other type of scaling
5
10 t
15
20
0
5
10 t
15
20
0
1
0
1
Log t
2
3
2
3
2.5
2.5
3
Log y 3.5 4
Log y 3 3.5 4
4.5
4.5
0
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Log t
Few points on Plots Plot helps us to summarize & reveal paKerns in data Graphics help us to idenHfy anomalies in data Plot helps us to present a huge amount of data in small space & makes huge data set coherent To get all the advantages of plot, the “Aspect RaHo” of plot is very crucial The raHo of Height to Width of a plot is called the ASPECT RATIO
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Aspect Ratio • Generally aspect raHo should be around 0.618 • However, for long Hme series data aspect raHo should be around 0.25. To understand the impact of aspect raHo see the two plots in the next two slides
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Aspect ratio
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Aspect ratio
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Preliminaries for Step 3 of 8-Step forecasting strategy
?
Should we use all historical data for forecas4ng
Training Data Valida4on Data
Solu4on = DATA PARTIONING
Fit the model only to TRAINING period Assess performance on VALIDATION period
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Partitioning
Deploy model by joining Training + ValidaHon to forecast the Future © 2013 ExcelR Solutions. All Rights Reserved
How to choose a Validation Period? Forecast Horizon
Seasonality
Strategy to choose Valida4on Data Period Length of series
Underlying condi4ons affec4ng series © 2013 ExcelR Solutions. All Rights Reserved
Rolling-forward forecasts
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NAÏVE Forecasts Forecast method: Last sample k-step ahead Seasonal series ( M series )
Ft+k = Yt Ft+k = Yt-M+k
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Forecast error • Forecast error is • If model is adequate, forecast error should contain no informaHon • Plots of et should resemble that of ‘white noise’ or uncorrelated random numbers with 0 mean and constant variance (There should be NO PATTERN)
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Forecast error • Forecast error can follow different distribuHons based on business context
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Forecasting Errors
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Evaluating Predictive Accuracy • Mean error • Mean absolute deviation • Mean squared error • Root mean squared error • Mean percentage error • Mean absolute percentage error © 2013 ExcelR Solutions. All Rights Reserved
Typical plots of ‘White noise’ Time plot
Lag plot ACF plot
Histogram © 2013 ExcelR Solutions. All Rights Reserved
Mean error (ME) • If the ME is around zero, forecasts are called unbiased. Model is unbiased to overestimation or the underestimation. Certainly this is a desirable property of a model Actual data
Forecast based on Model 1
Error from model 1
Forecast based on Model 2
Error from model 2
100
101
1
110
10
200
199
-1
190
-10
300
301
1
310
10
400
399
-1
390
-10
ME
0 © 2013 ExcelR Solutions. All Rights Reserved
0
Mean error • Mean error has the disadvantage that small amount and large amount of error may have same effect • To overcome this problem we may define two different forecast performance measure • 1. Mean Absolute DeviaHon:
• 2. Mean Square Error: © 2013 ExcelR Solutions. All Rights Reserved
MAD & MSE Actual data 100
Forecast based on Model 1 101
Error from model 1 1
Forecast based on Model 2 110
Error from model 2 10
200
199
-1
190
-10
300
301
1
310
10
400
399
-1
390
-10
MAD
1
10
MSE
1
100
ME
0
0
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Problem with ME, MAD, MSE • All these three measures are not unit free and also not scale free • Just think of a case that one is forecasHng sales figures. Someone in India using rupee figure, and somebody else in USA is expressing the same sales figure in dollar. Both are using the same model. However forecast measure will differ. This is a very awkward situaHon • MSE has the added disadvantage that its unit is in square. RMSE does not have this added disadvantage • So we need unit free measure © 2013 ExcelR Solutions. All Rights Reserved
MPE and MAPE---Unit free measure
• Both expressed in percentage form • Both are unit free © 2013 ExcelR Solutions. All Rights Reserved
Last Sample: Number of customers requiring repair work Customers Fitted value Residual Y_t e_t 58 54 58 -4 60 54 6 55 60 -5 62 55 7 62 62 0 65 62 3 63 65 -2 70 63 7 MAD 4.25
|e_t|
e_t^2
e_t/Y_t
|e_t/Y_t|
4 6 5 7 0 3 2 7 MSE 23.5
16 36 25 49 0 9 4 49 RMSE 4.85
-0.07407 0.1 -0.09091 0.112903 0 0.046154 -0.03175 0.1 MPE 0.0203
0.074074 0.1 0.090909 0.112903 0 0.046154 0.031746 0.1 MAPE 0.0695
Forecast method: Last sample © 2013 ExcelR Solutions. All Rights Reserved
MA: Number of customers requiring repair work Customers Y_t 58 54 60 55 62 62 65 63 70
Fitted value
Residual e_t
|e_t|
e_t^2
e_t/Y_t
|e_t/Y_t|
57.3333 56.3333 59.0000 59.6667 63.0000 63.3333
-2.3333 5.6667 3.0000 5.3333 0.0000 6.6667 MAD 3.83
2.3333 5.6667 3.0000 5.3333 0.0000 6.6667 MSE 19.91
5.4444 32.1111 9.0000 28.4444 0.0000 44.4444 RMSE 4.46
-0.0424 0.0914 0.0484 0.0821 0.0000 0.0952 MPE 0.0458
0.0424 0.0914 0.0484 0.0821 0.0000 0.0952 MAPE 0.0599
Forecast method: 3-point moving average © 2013 ExcelR Solutions. All Rights Reserved
Challenges
Zero Counts Missing values Compute average metrics Exclude missing values
MAE/RMSE: no problem Cannot compute MAPE Exclude Zero count Use alternate measure - MASE
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Forecast / Prediction Interval
1 2 3
Probability of 95% that the value will be in the range [a,b] If the forecast errors are normal, predic4on interval is σ = es4mated standard devia4on of forecast errors k = some mul4ple (k=2 corresponds to 95% probability)
Challenges to formula
• Errors ofen non-normal • If model is biased (over/under-forecasts), symmetric interval around Ft+k? • EsHmaHng the error standard deviaHon is tricky One soluHon is transforming errors to normal
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Forecast / Prediction Interval – Non-Normal To construct predicHon interval for 1-step-ahead forecasts 1. Create roll-forward forecasts (Ft+1) on validaHon period 2. Compute forecast errors 3. Compute percenHles of error distribuHon (e(5)=5th percenHle; e(95)=95th percenHle) 4. PredicHon interval: [ Ft+1 + e(5) , Ft+1 + e(95) ] In Excel =percen+le 5th percenHle = -307.0 95th percenHle = 292.8 95% predicHon interval for 1-step ahead forecast Ft+1: [Ft+1 – 307 , Ft+1 + 292.8] © 2013 ExcelR Solutions. All Rights Reserved
Forecasting Different Methods
• • • • •
Linear regression Autoregressive models ARIMA LogisHc regression Econometric models
Model based
Data driven
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• Naïve forecasts • Smoothing • Neural nets
Forecasting Different Methods Linear Model: Yt = βo + β1t + ε ExponenHal Model: Log (Yt) = βo + β1t + ε QuadraHc Model: Yt = βo + β1t + β2t2 + ε AddiHve Seasonality: Yt = βo + β1DJan + β2DFeb + β3DMar + …...+ β11DNov + ε AddiHve Seasonality with QuadraHc Trend: Yt = βo + β1t + β2t2 + β3DJan + β4DFeb + β5DMar + …...+ β13DNov + ε MulHplicaHve Seasonality: Log (Yt) = βo + β1DJan + β2DFeb + β3DMar + …...+ β11DNov + ε © 2013 ExcelR Solutions. All Rights Reserved
Irregular Component Irregular Components
Solutions
• Outliers
• Remove unusual periods from the model
• Special Events • Model separately • Interventions • Keep in the model, using dummy variable © 2013 ExcelR Solutions. All Rights Reserved
External Information ForecasHng Airline Ticket Price
ForecasHng Internet Sales
Fuel price impacts the airline Hcket
Amount spend in adverHsements
Airfaret = b0 + b1 (Petrol Price)t + e Must be forecasted
Sales(t) = g{ f(sales(t-1, t-2, ... , t-6), a1*SQRT[AdSpend(t-1)] + ... + a6*SQRT[AdSpend(t-6)] }
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Linear Regression for forecasting
1
2
Global Trend
Seasonality
• Linear Trend (constant growth) • ExponenHal Trend (% growth)
• AddiHve (Y) • MulHplicaHve log(Y)
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3 Irregular PaHerns
Autoregressive (AR) Models • AR model is used to forecast errors • AR model captures autocorrelaHon directly • AutocorrelaHon measures how strong the values of a Hme series are related to their own past values • Lag(1) autocorrelaHon = correlaHon between (y1, y2, …, yt-1 ) and (y2,y3,…, yt) • Lag(k) autocorrelaHon = correlaHon between (y1, y2, …, yt-k) and (yk+1,yk+2,…,yt) © 2013 ExcelR Solutions. All Rights Reserved
Autocorrelation & its uses Check forecast errors for independence
Model remaining information
Evaluate predictability © 2013 ExcelR Solutions. All Rights Reserved
Autoregressive Model • MulH-layer model • Model the forecast errors, by treaHng them as a Hme series • Then examine autocorrelaHon of “errors of forecast errors” ? ü If autocorrelaHon exists, fit an AR model to the forecast errors series ü If autocorrelated, conHnue modeling the level-2 errors (not pracHcal) • AR model can also be used to model original data Yt = α + β1Yt-1 + β2Yt-2 + εt -> AR(2), order = 2 1-step ahead forecast: Ft+1 = α + β1Yt + β2Yt-1 2-steps ahead: Ft+2 = α + β1Ft+1 + β2Yt 3-steps ahead: Ft+3 = α + β1Ft+2 + β2Ft+1 © 2013 ExcelR Solutions. All Rights Reserved
Autoregressive Model • Use level 1 to forecast next value of series Ft+1 ^
• Use AR to forecast next forecast error (residual) Et+1 • Combine the two to get an improved forecast F*t+1 ^ F*t+1 = Ft+1 + Et+1
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Random Walk • Specific case of AR(1) model • If β1 = 1 in AR(1) model then it is called as Random Walk • EquaHon will be Yt = a + Yt-1 + εt a = drif parameter σ(std of ε) = volaHlity
• Changes from one period to the next are random • How to find out whether there in random walk to not in the data? • Run AR(1) model & check for the value of β1 • Do a differenced series and run ACF plot • How to esHmate drif & volaHlity? © 2013 ExcelR Solutions. All Rights Reserved
Random Walk • One-step-ahead forecast: Ft+1 = a + Yt • Two-step-ahead forecast: Ft+2 = a + Yt+1= 2a + Yt • k-step-ahead forecast : Ft+k = ka + Yt • If the drif parameter is 0, then the k-step-ahead forecast is Ft+k = Yt for all k
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Model based approaches & drawbacks
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Model vs Data based approaches Model Based Approach
01
Past is SIMILAR to Future
Data Based Approach
02
Past is NOT SIMILAR to Future © 2013 ExcelR Solutions. All Rights Reserved
Forecast methods based on smoothing There are two major forecasHng techniques based on smoothing • Success depends on choosing window width • Balance between over & under smoothing
– Moving averages
– ExponenHal smoothing
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Smoothing – Moving Average Smoothing Noise
ForecasHng
4 uses
• •
Forecast future points by using an average of several past points More suitable for series with no Trend & no seasonality
Data VisualizaHon
• •
Removing Seasonality & CompuHng seasonal indexes © 2013 ExcelR Solutions. All Rights Reserved
A Hme-plot of the MA reveals the Level & Trend of a series It filters out the seasonal & random components
Moving Average - Calculations Trailing Moving Average It is calculated based on a window from Hme ‘t’ & backwards
Centered Moving Average It is calculated based on a window centered around Hme ‘t’ 6000 5250
3750 3000 2250
Q
186 386 Q 18 Q 7 387 Q 18 Q 8 38 Q 8 189 Q 38 Q 9 190 Q 39 Q 0 19 Q 1 391 Q 19 Q 2 39 Q 2 193 Q 39 Q 3 194 Q 39 Q 4 19 Q 5 395 Q 196
1500
Q
Sales
4500
Quarter
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Calculation – Trailing MA 1.
Choose window width (W)
2.
For MA at Hme t, place window on Hme points t-W+1,…,t
W=5 t-3 t-2
t-4 3.
t-1
t
Compute average of values in the window:
MAt =
yt −W +1 + yt −W + 2 + ! + yt −1 + yt W
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Calculation – Centered MA Compute average of values in window (of width W), which is centered at t Odd width: center window on Hme t and average the values in the window Even width: take the two “almost centered” windows and average the values in them
W=4
W=4 t-2
W=5 t-1 t t+1
⎛yyt − 2++yyt −1++yyt++yyt +1+ y⎞ t −1 t t +1 + ⎟t + 2 MAt =⎜ t −2 4 ⎟/2 5 MAt = ⎜ ⎜ yt −1 + yt + yt +1 + yt + 2 ⎟ ⎜ ⎟ 4 ⎝ ⎠
t+2
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Moving Average Hands On
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Exponential Smoothing Simple Exponen4al Smoothing • No Trend • No Seasonality • Level • Noise (cannot be modeled)
Holt’s method • Also called double exponenHal • Trend • No Seasonality
Winter’s method
• Assigns more weight to most recent observaHons
• Trend • Seasonality • Variants are possible
• Assigns less weight to farthest observaHons
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Simple Exponential Smoothing Forecasts = es+mated level at most recent Hme point: Ft+k = Lt AdapHve algorithm: adjusts most recent forecast (or level) based on the actual data:
Lt = αYt + (1-α) Lt-1
α = the smoothing constant (0
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