MSO S04 - Exponential Smoothing With Solutions

Time Series and Forecasting Lecture 4 with solutions
Moving averages and exponential

smoothing with solutions.
Objectives
By the end of this weeks work you should be able to:
briefly describe the use of smoothing methods to produce forecasts in a business
context;
use a simple average to produce a forecast and explain when it may be
appropriate to use this method;
use and briefly discuss moving averages and explain how changing the number of
observations used in the average affects the smoothing results;
explain when a moving average method may be appropriate for forecasting and
discuss its weaknesses;
explain the rationale of exponential smoothing;
describe when simple exponential smoothing may be appropriate and use this
method to produce forecasts either by a hand calculation or using Excel;
show that a simple exponential smoothing forecast is a weighted average of past
values of a time series which places greater emphasis on the most recent
observations;
explain how the value of the smoothing constant, , affects the forecast;
decide on a value for in a given situation and justify that choice.
Introduction
Imagine you are the manager of a large department store with hundreds of product
lines. You may need to produce forecasts for all of these products on a regular basis
weekly or monthly forecasts for instance. You could develop sophisticated models
to produce the forecasts for each product line but probably a quicker, less
sophisticated method will do the job just as well.
Time series smoothing methods are popular options in this type of situation for
producing forecasts. Smoothing methods use a form of weighted average of past
observations to smooth the up and down movements in the data it is a method
which smooths out short term variations or fluctuations in the data.
Sophisticated methods often require large data sets as they rely on estimating a
model to describe the time series and using this model to produce forecasts.
Smoothing methods can be used with much smaller data sets and are often the
method of choice in these situations.
Time Series and Forecasting

2014/15
Dr Cathy Minett-Smith and Gary Hearne

Middlesex University Business School
Page 2
Smoothing
methods
Moving averages and exponential smoothing with solutions
We will be looking at four different smoothing methods in this module.

Moving averages a revision of ideas you will have encountered in a level 1
module.
Simple exponential smoothing.
Holts exponential smoothing
Winters (or Holt-Winters) exponential smoothing.
All of these methods are similar in the fact that they only need past observations of
the time series to produce a forecast. The appropriate method to use in a specific
situation will depend on the characteristics of the time series. Specifically:
Does the time series exhibit either an upward or a downward trend?
Is there a seasonal component evident in the time series?
So before starting to use one of the methods it is important that you complete an
initial exploratory data analysis using techniques such as time series plots.
Strategy for
producing
forecasts
The following steps can be followed to produce forecasts using smoothing methods.
1. Select an appropriate smoothing technique based on characteristics of the time
series evident in a time series plot for example.
2. If possible split the data into parts, an initialisation or fitting section and a test or
forecasting section.
3. Use the initialisation section to identify the exact form of the smoothing method
to use with the given data set.
4. Use the smoothing method to produce forecasts for the test section of the data and
evaluate the accuracy of these forecasts.
5. Make a decision to either use the method as it stands to produce the forecasts, or
modify the method or use another forecasting technique.
u The calculations associated with smoothing forecasts are easily computed by

hand, although it can become a little tedious. During the next two lectures you
will be performing the calculations by hand to ensure you develop a sound
understanding of the techniques. However, you will be expected to use EXCEL
to produce smoothing forecasts. Minitab and SPSS also produce forecasts for
smoothing methods but they do not enable you to demonstrate your
understanding of the techniques. For this reason you will be expected to use
EXCEL in the labs and for your coursework but you can still use Minitab etc as
a final check if you wish.
Notation

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We will be using the following notation relating to forecasts during the next two
lectures. There is no standard notation associated with forecasting so you will see a
variety of different notations in text books referring to data and forecasts.

Past data
Yt 3
Yt 2
Yt 1
Page 3
Current
time point
Forecasts of future values
Yt
Ft +1
Ft + 2
Ft +3
..
Yt is the most recent observation of a variable or time series.
Ft +1 is the forecast for one time point or period in the future etc.
Moving Averages
Simple averages
The easiest way of using the past observations in a data set to produce a forecast is to
just to use the average or mean of the previous observations as the forecast.
Example 1
Table 1 details the amount of petrol used each week for a company who operate a
fleet of vehicles for transporting disabled and elderly patients. Figure 1 shows a time
series plot for this data.
Does the plot in figure 1 indicate the presence of a trend or seasonal

component in the time series?
No trend component as the plot is constant in level.
No pattern repeating itself in cycles of fixed length so there is no seasonal
component.

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Page 4
Table 1 Petrol usage for Spokane Transit Authority

Week (t)
Gallons ( Yt )
Week (t)
Gallons ( Yt )
Week (t)
Gallons ( Yt )
275
11
302
21
310
291
12
287
22
299
307
13
290
23
285
281
14
311
24
250
295
15
277
25
260
268
16
245
26
245
252
17
282
27
271
279
18
277
28
282
264
19
298
29
302
10
288
20
303
30
285
th
Data source: Hanke, Wichern and Reitsch. Business Forecasting (7 edition) Prentice Hall. Pg 100.
Figure 1 Petrol usage for Spokane Transit Authority.
310
300
Gallons
290
280
270
260
250
240
Week

2014/15
10
20
30

Page 5
To produce a simple average forecast for this time series we now need to decide on
an initialisation period say the first 28 observations.
Based on the first 28 observations produce a simple average forecast

for observation 29.
(275+291+307+.+271+282)/28 = 7874/28 = 281.21
What is the error associated with this forecast?

actual value forecast = 302-281.21 = 20.79
How would you now calculate a forecast for observation 30?

[(28*281.21)+302]/29 = 281.93
Now calculate a forecast for observation 31.

[(29*281.93)+285]/30 = 282.03
Would this method work if there were a significant trend in the series?
Explain your answer.
No. An average will tend to be in the middle of the range of the
observations from which it was calculated. Therefore, if there is upward
trend the average will always tend to be too low and if there is downward
trend it will tend to be too high.
A simple average uses all of the past observations to produce a forecast and places
equal weight or importance on all of the observations. This is only appropriate if the
time series is relatively stable - i.e. there is no trend or seasonal component in the
time series. The time series could be described as varying randomly about a constant
mean value the number of appointments per week at a dentist surgery with a fairly
constant patient base could be expected to have this characteristic.

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Page 6
Moving averages
What if you are more interested in the most recent observations for the purposes of
producing a forecast? Placing equal importance on all past observations would no
longer be feasible. You may want to use the average of only the most recent
observations and use a moving average instead. The number of observations to be
used in computing each average is decided at the beginning of the exercise and then
stays the same for all subsequent forecasts. For example, we could decide that five
observations should be used to calculate each average, this means that the five most
recent observations are used to produce the forecast. As each new observation
becomes available a new mean is computed by adding the newest value and
dropping the oldest. You will have met this idea in either STX1110 or STX1210 at
level 1.
A moving average of order k is computed by
Ft +1 =
Yt + Yt 1 + Yt 2 + ....... + Yt ( k 1)
k
where
Ft +1 is the forecast
Yt is the actual value of the time series at time t
k is the number of observations used in the moving average.
So this forecast is just the arithmetic mean of the k most recent observations.
Does a moving average forecast place equal weight on all the

observations used in its calculation?
Ans: Yes
Example 2
Table 2 shows you the process of calculating moving averages of order 5 for the
transport company data used in example 1.

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Page 7
Table 2 Moving average forecast (order 5) for the Spokane Transit Authority.
t
Gallons
(Yt )
Ft
et = (Yt Ft )
275
291
307
281
295
268
289.8
-21.8
252
288.4
-36.4
279
280.6
-1.6
264
275.0
-11.0
10
288
271.6
16.4
11
302
270.2
31.8
12
287
277.0
10.0
13
290
284.0
6.0
14
311
286.2
24.8
15
277
295.6
-18.6
16
245
293.4
-48.4
17
282
282.0
0.0
18
277
281.0
-4.0
19
298
278.4
19.6
20
303
275.8
27.2
21
310
281.0
29.0
22
299
294.0
5.0
23
285
297.4
-12.4
24
250
299.0
-49.0
25
260
289.4
-29.4
26
245
280.8
-35.8
27
271
267.8
3.2
28
282
262.2
19.8
29
302
30
285
The moving average forecast for observation 6 ( Y6 ) in table 2 is

289.9. Show that this is correct.
(275+291+307+281+295)/5 = 1449/5 = 289.8

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Page 8
Why are there no forecasts for time points 1 to 5?

Not enough data to produce moving average forecasts based on 5
observations.
Calculate the moving average forecast of order 5 for observation 29.

What is the error associated with this forecast?
(20+260+245+271+282)/5 = 1308/5 = 261.1
Error = 302-261.6 = 40.4
Calculate the forecasts for observations 30 and 31.

Observation 30 : Forecast = 272 , Observation 31: Forecast = 277
Using Excel to calculate moving average forecasts
Excel makes light work of all the repeat calculations involved in producing moving
average forecasts. The following notes take you through the steps in Excel, which
will produce the calculations presented in Table 2.
1. Open up a fresh worksheet in Excel and use the first row to explain the contents of
each column. In Figure 2 you will see that I have used the titles time, gallons,
forecast and error. I have then left a blank row before entering the data.
2. Enter the data into column B cells B3-B32
Calculating the
forecasts.
3. Highlight cell C8.

4. Use the function button as you were shown in week 2 to calculate the average of
the first 5 data points.
=AVERAGE(B3:B7)
This will calculate the average of the first 5 observations and, when you hit
return, puts the answer in cell C8. The worksheet should now look similar to the
one presented in Figure 2.

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Page 9
Figure 2 using excel to produce moving average forecasts.
5. Copy cell C8 and paste it into cell C9. The value 288.4 now appears in cell C9
which is the average of the value in cells B4-B8. (Excel has automatically used
cells B4-B8 rather than B3-B7 as it uses relative cell referencing.)
6. Copy cell C8 into the remaining cells C10-C32.
Calculating the
errors.

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You were shown how to calculate errors in week 2. If you follow the instructions
detailed in the handout for week 2 you will be able to produce the absolute errors,
squared errors, percentage error and absolute percentage error with their relevant
summary statistics which can then be used for comparing different forecasting
methods. Your spreadsheet should look similar to Figure 3.

Page 10

Figure 3 complete Excel analysis for petrol usage data.

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In your own time check that you can produce the results in figure 3.

Page 11
Using Minitab to calculate moving average forecasts

The same calculations can be produced in Minitab. As you do not need to enter the
formula for the moving average in Minitab you are not able to demonstrate your
understanding of the underlying calculations. As a result you will be expected to use
Excel on this module for moving averages but you can use Minitab to check your
answers or provide graphics if you wish. Moving averages can be calculated in
Minitab using Stat Time Series Moving average
Select the variable relating to the petrol usage and enter 5 for the MA (moving
average) length. Do not click the Center moving average box. Click generate
forecasts and indicate 1 by Number of forecasts.
Click the results option box and select a plot of predicted vs actual graphic and
the summary and results table. This will give the output shown in Figures 4 and
5. The last two columns of the summary table in figure 4 match the calculations
presented earlier in table 2.
Figure 4 Predicted vs actual time series plot for petrol usage.
Moving Average
330
Actual
Predicted
gallons
Forecast
Actual
Predicted
Forecast
280
Moving Average
Length:
230
0
10
20
MAPE:
7.503
MAD:
20.584
MSD:
622.149
30
Time

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Page 12

Figure 5 results table of order 5 moving average for petrol usage data.
Moving average
Data
Length
NMissing
gallons
30.0000
0
Moving Average
Length: 5
Accuracy Measures
MAPE:
7.503
MAD:
20.584
MSD: 622.149

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Row
Period
gallons
MA
Predict
Error
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
275
291
307
281
295
268
252
279
264
288
302
287
290
311
277
245
282
277
298
303
310
299
285
250
260
245
271
282
302
285
*
*
*
*
289.8
288.4
280.6
275.0
271.6
270.2
277.0
284.0
286.2
295.6
293.4
282.0
281.0
278.4
275.8
281.0
294.0
297.4
299.0
289.4
280.8
267.8
262.2
261.6
272.0
277.0
*
*
*
*
*
289.8
288.4
280.6
275.0
271.6
270.2
277.0
284.0
286.2
295.6
293.4
282.0
281.0
278.4
275.8
281.0
294.0
297.4
299.0
289.4
280.8
267.8
262.2
261.6
272.0
*
*
*
*
*
-21.8
-36.4
-1.6
-11.0
16.4
31.8
10.0
6.0
24.8
-18.6
-48.4
0.0
-4.0
19.6
27.2
29.0
5.0
-12.4
-49.0
-29.4
-35.8
3.2
19.8
40.4
13.0
Row
1
Period
31
Forecast
277
Lower
228.112
Upper
325.888

Page 13
The final row of Figure 5 is the forecasts for observation 31. Does this
match the value you calculated earlier?
Ans ; Yes
What do the lower and upper values in this part of the output tell
you?
Ans: 95% confidence (or prediction) interval associaetd with the forecast)
In Figure 4 how well does the predicted moving average match the
actual data?
Ans; The peaks and troughs in the moving average forecast lag the peaks and
troughs in the actual data.
A major problem with moving average models is the fact that they are not very good
at predicting peaks and troughs in the data.
Choosing the value

for k.
If you are using a moving average forecast you need to make a judgement about
what value of k to use i.e. how many observations should you use when calculating
each average?
Can you remember anything from your level 1 module about the best
choice of k in a given situation?
Ans: If the data is seasonal the value of k should match the period of the
seasonal component. If the data is quarterly k=4 etc.
Figure 6 shows moving average forecasts for the transport company

data. The first graph is using a moving average of order 3 (i.e. k = 3)
and the second is using a moving average of order 8. What are the
differences in the predicted moving average forecasts in each graph?
Ans; k=3 results in a moving average which reflects the ups and dwons of the
data more whereas when k=8, the moving average forecast is smoother.
If k is small, greater emphasis is placed on more recent observations so
the moving average tracks changes in the data more closely.

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Page 14

Figure 6 Moving average forecasts for petrol usage data.
Moving Average
Actual
330
Predicted
Forecast
Actual
Predicted
Forecast
gallons
310
290
Moving Average
270
Length:
250
10
20
MAPE:
6.489
MAD:
17.815
MSD:
483.881
30
Time
Moving Average
318
Actual
308
Predicted
Forecast
298
Actual
Predicted
Forecast
gallons
288
278
268
Moving Average
258
Length:
248
238
228
0
10
20
MAPE:
6.380
MAD:
17.563
MSD:
457.979
30
Time
A large value of k will have a greater smoothing effect on the data than a smaller
value. This is because a smaller value of k places more weight on recent observations
and as a result the moving average responds to and tracks changes more closely. So
a small value for k should be chosen when there are sudden changes in the series
whereas a larger value should be chosen when there are less fluctuations in the
series. If a moving average is being used with seasonal data such as quarterly or
monthly, the value of k should be chosen to match the length of the seasonal factor to
smooth out these effects. For example, for quarterly data a moving average of order
four, (k = 4) should be used.

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Data with a trend.
Page 15
As with a simple average the moving average method does not cope well when there
is an upward or downward trend in the data. This is illustrated in Figure 7.
Figure 7 Moving average of order 3 for some fictitious data.
Moving Average
100
Actual
Predicted
Forecast
data
90
Actual
Predicted
Forecast
80
Moving Average
70
60
10
Length:
MAPE:
6.1745
MAD:
4.8056
MSD:
30.2130
15
Time
What is the nature of the trend in this data?
Ans: Upward
How well do the predicted values match the data?
Ans: The predicted values are too low.
Do you think the forecast is likely to be accurate? Explain your

answer.
Ans: No, the forecast is not likely to be accurate. It will probably be an

underestimate.
You can use Double moving averages to try and address these problems. You can
read about this in Hanke, Wichern and Reitsch, Business Forecasting (seventh
edition) page 104.

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Page 16
Exponential Smoothing
Consider the time series plot in Figure 8. The initial observations seem to be
fluctuating about a constant value of around 55. However, the more recent
observations are showing a change in pattern and exhibiting an increase. As a result
the initial values of the time series bear little resemblance to the more recent
observations.
Figure 8 Time series plot of fictitious data.
80
data
70
60
50
Index
10
15
20
It could be argued that, for forecasting purposes, the most recent observations
contain the most relevant information and as a result they should be given more
importance, or weight, in the calculation of the forecast. This is what exponential
smoothing achieves. The forecast value at any time t is a weighted average of all the
available previous values. The most recent observations are given the highest
weights and earlier observations are given lower weights. As a result the most recent
observations have more influence over the forecast than earlier observations.

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Simple exponential
smoothing.
Page 17
Simple exponential smoothing is appropriate for producing forecasts when there is

no trend or seasonal component in the data. The formula for producing a simple
exponential smoothing forecast is:
Ft +1 = Yt + (1 ) Ft
Equation 1
Ft +1 is the forecast at time t+1
is called the smoothing constant and must have a value between 0 and 1
(0< <1).
Yt is the actual value of the time series at time t.
Ft is the forecast at time t (or smoothed value at time t).
So the forecast at time t+1 can be thought of as weighted average of the observation
at time t and the old forecast for the observation at time t.
Error correction
form
If we take equation 1 and rearrange it so that all the terms involving are brought
together we get the following.
Ft +1 = Yt + (1 ) Ft
Ft +1 = Yt + Ft Ft
Ft +1 = Ft + (Yt Ft )
Ft +1 = Ft + t
Equation 2
In equation 2, t is the difference between the actual observation at time t and the
forecast at time t i.e. t is the error associated with the forecast at time t.
From this form of the forecast equation we can see that the exponential smoothing
forecast learns from past errors. The forecast at time t+1 ( Ft +1 ) is simply the old
forecasts ( Ft ) adjusted by times the error in this forecast. So exponential
smoothing is a procedure for revising a forecast in the light of more recent
experience.
If the error at time t was positive, was the forecast at time t higher or
lower than the actual observation?
Ans: Lower

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Page 18
If the error at time t is positive, is the forecast at time t+1 higher or

lower than the forecast at time t?
Ans: Using equation 2, if and t are both positive the next forecast will be
higher than the last one. A positive error indicates that the last forecast
was too low so at the next stage it is increased to adjust for this mistake.
What happens if the error at time t is negative?

Ans: The next forecast is reduced.
This error correction form of the forecast equation is very easy to use. All we need
to produce the forecast at the next time point is the actual value for this period and
the forecast value for this period. However all the past values of the time series are
still included in the forecast which the next activity demonstrates.
By substituting for Ft in equation 1 show that all past values of the

time series are included in the calculation of the forecast Ft +1 .
This was covered in the lecture and is not reproduced here. See Gary if
you have difficulty completing this activity.

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Page 19
You should have produced workings something similar to the following.
Ft +1 = Yt + (1 ) Ft
Ft +1 = Yt + (1 )[Yt 1 + (1 ) Ft 1 ] = Yt + (1 )Yt 1 + (1 ) 2 Ft 1
By repeatedly substituting for Ft 1 etc it is relatively easy to show that
Ft +1 = Yt + (1 )Yt 1 + (1 ) 2 Yt 2 + (1 ) 3 Yt 3 + .....
Equation 3
If =0.6 equation 3 becomes
Ft +1 = 0.6Yt + 0.6(1 0.6)Yt 1 + 0.6(1 0.6) 2 Yt 2 + 0.6(1 0.6) 3 Yt 3 + .....
Ft +1 = 0.6Yt + 0.24Yt 1 + 0.096Yt 2 + 0.0384Yt 3 + .....
!
!
Equation 4
In your own time check that these coefficients are correct.

In equation 4, which of the past values of the time series has the
greatest influence on the forecast Ft +1 .
Ans: The most recent observation Yt as it has the biggest coefficient.
What would the forecast Ft +1 be if =1?

Ans: Ft +1 = Yt , tomorrow is the same as today prinicple.
What would the forecast Ft +1 be if =0?

Ans: Ft +1 = Ft . The forecast does not depend on the data. Once youve
guessed or evaluated the first forecast all subsequent forecasts will be the
same.
Consider the values of the weights for various values of presented

in table 3. How does the dependence of Ft +1 on past values of the
time series change as varies between 0 and 1?
See the comment under table 3.

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Table 3 Comparison of weights of past observations for various
values of in simple exponential smoothing.
Observation
Weight
=0.1
=0.5
=0.7
Yt
0.1
0.5
0.7
(1 )Yt 1
(1 )
0.09
0.25
0.21
(1 )2 Yt 2
(1 )2
0.081
0.125
0.063
(1 )3 Yt 3
(1 )3
0.073
0.0625
0.0189
If is chosen close to 1, recent values of the time series are weighted heavily
relative to those of the distant past. If is chosen close to 0, the values of the time
series in the past are given weights comparable to those given to recent values.
Regardless of the values of the weights will tend to sum to 1.
Choosing a value
for .
The choice of the value for depends on how much you want the current
observation to influence the forecast. When is close to one the new forecast will
contain a substantial adjustment for any error in the previous forecast. If is close
to zero, the new forecast will be very similar to the old one. As a guide choose
values of close to zero if the series has a great deal of random variation and you
want to minimise the impact of this variation on the forecast. Choose values close to
1 if you want the forecast to be influenced by recent changes in the actual values. In
practice the value of is often taken to be between 0.05 and 0.5 with 0.3 being a
good starting point. In judging which is the best value of to use you should
choose a value which minimises the root mean square error (RMSE) as shown in the
following example.
Example 3
The number of calls received on a telephone helpline for the last 7 days are, 96, 93,
97, 96, 102, 105 and 99. The trend for this data can be assumed to be negligible.
Using a smoothing constant of 0.1 evaluate the smoothing forecast for the number of
calls received on day 8.
This is quite a small data set so we will not produce an exploratory time series plot to
check the overall characteristics of the data. Normally you would produce a time
series plot first use it to establish if there is a trend or seasonal component in the
data.

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Page 21
We now need to initialize the forecasting process. There are a number of ways that
you can do this but we will start off by initially setting the forecast for the second
observation, F2 , to be equal to the first observation 96.
What is the error, 2 , associated with this forecast?

Ans: 93-96=-3
If = 0.1 we can now calculate the forecast for the time point 3, F3 , using
F3 = Y2 + (1 )F2 = (0.1 93) + [(1 0.1) 96] = 9.3 + 86.4 = 95.7

Alternatively we can use the error correction form of the model to evaluate the
forecast using
F3 = F2 + 2 = 96 + (0.1 3) = 95.7
The forecasts, or smoothed values, for the whole data set, along with their associated
errors are presented in table 4.
Table 4 Simple exponential smoothing forecast for number of calls
received on a telephone help line.
!
!
time
data (number of calls)
forecast or smoothed value
error
96
93
96
-3
97
95.7
1.3
96
95.83
0.17
102
95.847
6.153
105
96.462
8.538
99
97.316
1.684
In your own time verify that these values are correct using a hand
calculation.
Evaluate the forecast of the number of calls to the helpline on day 8.
Ans: (0.1*99)+(1-0.1)*(97.316) = 97.4844

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Page 22

The root mean square error for this forecasting procedure is evaluated using
RMSE =
(Y
Y2
n
t2
n
Verify that the RMSE for the calculations in table 4 is 4.55 (to 2 dp).
124.3112 = 4.55
6
Using Excel to calculate simple exponential smoothing forecasts.

1. Open up a fresh worksheet in Excel and use the first row to explain the contents
of each column. In Figure 9 you will see that I have used the titles time, calls,
forecast and error.
2. Enter the data into column B cells B3-B9
3. Initialize the forecasting process by entering the first observation (96) as the
forecast for time point 2, F2 . That is, put the value 96 into cell C4 of the
spreadsheet as shown in Figure 9.
Figure 9
4. Evaluate the forecast F3 by highlighting the cell C5 and entering the formula
=0.1*B4+(1-0.1)*C4

2014/15

Page 23
5. Copy cell C5 into cells C6 to C9 to give the results in figure 10. (Notice that I
have formatted column C5 to show 2 dp.)
Figure 10
6. You can calculate errors and their relevant summary measures as detailed in the
handout for week 2. Your final spreadsheet should look similar to the one
presented in figure 11.
Figure 11

2014 / 2015

Page 24
Changing the value

of
Once you have completed the spreadsheet for one value of it is easy to update it
using a different value for the smoothing constant. The value of in the above
exercise was 0.1 - suppose we want to see what happens to the RMSE if we use
=0.4. If you go back into cell C5 the expression used to calculate C5 is in the
formula bar. Change the 0.1 to a 0.4 in this expression. Then copy cell C5 into cells
C6 to C9. You will find that the spreadsheet updates itself and the RMSE is 4.108.
Table 4 shows the value of RMSE for various values of for the
telephone data in example 3. Based on this information which value of
should be used for producing forecasts.
Ans: The RMSE is lowest when =0.6
Table 4 Comparison of RMSE for varying values of for the
telephone data.
(Y Y )

2014/15
(Y Y )
RMSE =
0.1
124.3063
4.55
0.2
114.1912
4.36
0.3
106.456
4.21
0.4
101.2615
4.18
0.5
98.3955
4.05
0.6
97.48711
4.03
0.7
98.15374
4.04

Page 25
Concluding comments.
This lecture has demonstrated that moving average methods are a quick way of
generating forecasts, particularly if you exploit the features of a spreadsheet system
such as Excel. They can be used with small data sets which gives them an
advantage over some more sophisticated methods and they are quite simple to use.
However, they are limited in the sense that the forecasts tend to lag behind the actual
data and the methods we have considered in this lecture cannot adjust for trend in the
data.
Exponential smoothing assumes the continuation of a historical pattern into the
future. It would be useful to develop a way of measuring if this pattern has changed
so that we can reassess our forecasting procedure. A tracking signal is one way of
monitoring this change. We will not consider tracking signals in this module but you
can read about it in Hanke, Wichern and Reitsch.
Moving averages and exponential smoothing lecture check list

The following list details the analyses and discussions you should be able to
complete if you have covered and understood all of this weeks work.
You should be able to:
calculate moving average forecast either by hand or using Excel;
explain how the period of the moving average affects the resulting forecasts;
calculate simple exponential smoothing forecasts either by hand or in Excel;
explain what is meant by the error correction form of a simple exponential
smoothing forecast;
show that all the past values of a time series are included in a simple
exponential smoothing forecast;
explain how the weighting of past values in the time series varies as the value
of the smoothing constant changes;
select a value of to use in simple exponential smoothing and justify this
choice by referring to appropriate error summaries;
use Minitab to check results of moving average forecasts and simple
exponential smoothing forecasts;
explain why moving averages and simple exponential smoothing forecasts are
not appropriate if the time series has a trend component.

2014 / 2015

Page 26
Lab exercises
Exercise 1
a) Use Excel to produce the moving average forecasts of the petrol usage
data as shown in figure 3.
b) Use Excel to produce the simple exponential smoothing forecasts for the
telephone data as shown in figure 11.
Exercise 2
For this exercise we will return to the bread data which we have used in previous
weeks. You should already have this in an Excel worksheet as you worked on this
data in week 2. If not, copy the data from the Minitab worksheet (bread.mtw) in the
data files area of the OASIS page for this module.
a) Calculate a moving average forecast of period 3 for this data.
b) Calculate the values of the mean error (ME), mean absolute error
(MAE), mean squared error (MSE), root mean squared error (RMSE),
mean percentage error (MPE) and mean absolute percentage error
(MAPE).
c) Produce a time series plot of the actual and forecast values on the same
graph.
d) What would be the value of the forecast for time point 31?
e) Repeat parts (a)-(d) using a moving average of period 7.
f) Which moving average period would you use if you wanted to limit the
impact of the short-term fluctuations on the resulting forecasts? Explain
your answer.
g) How do the answers obtained for this exercise compare with those of
exercise 3 in week 2?

2014/15

Exercise 3
Page 27
For this exercise we will return to the Microsoft stock closing prices data which we
have used in previous weeks. You should already have this in an Excel worksheet as
you worked on this data in week 2. If not, copy the data from the Minitab worksheet
(msft.mtw) in the data files area of the OASIS page for this module.
The Microsoft stock closing prices data consists of five time series. Use the close
data when doing the following exercises:
a) Use Excel to calculate the simple exponential smoothing forecast for the
data using a smoothing constant value =0.1. In addition, calculate
appropriate error summary statistics.
b) Repeat part (a) using a smoothing constant value, =0.4.
c) Do you prefer the forecasts produced in part (a) or part (b)? Explain
your answer.
d) Use the single exponential smoothing routine in Minitab to produce
forecasts for the close data. Under weight to use in smoothing choose
optimise then click OK. How does this compare with your answers to
parts (a) and (b)? What do you think this routine in Minitab is doing?
Exercise 4

2014 / 2015
Use moving averages and simple exponential smoothing to forecast the remaining
time series in the Microsoft stock closing prices data set.

Page 28
Solutions to lab exercises
Exercise 1
Refer to the lecture notes.
Exercise 2
a) See table headed Moving Average Period 3 on the next page.
b)
ME
0.17
MAE
2.17
MSE
7.12
RMSE
2.67
MPE
0.00
MAPE
0.04
c)
Sales and moving average forecasts of period 3
sales
56
54
52
50
48
Series1
Series2
28
25
22
19
16
13
10
46
44
42
day

2014/15

Page 29
Moving Average period 3

time
sales forecast (p3) error
48
49
48
48
48.3333
-0.3333 0.33
0.11
-0.69% 0.69%
49
48.3333
0.6667
0.67
0.44
1.36%
54
48.3333
5.6667
5.67
32.11
10.49% 10.49%
49
50.3333
-1.3333 1.33
1.78
-2.72% 2.72%
50
50.6667
-0.6667 0.67
0.44
-1.33% 1.33%
47
51.0000
-4.0000 4.00
16.00
-8.51% 8.51%
10
48
48.6667
-0.6667 0.67
0.44
-1.39% 1.39%
11
53
48.3333
4.6667
21.78
8.81%
12
47
49.3333
-2.3333 2.33
5.44
-4.96% 4.96%
13
53
49.3333
3.6667
13.44
6.92%
14
50
51.0000
-1.0000 1.00
1.00
-2.00% 2.00%
15
49
50.0000
-1.0000 1.00
1.00
-2.04% 2.04%
16
51
50.6667
0.3333
0.33
0.11
0.65%
17
48
50.0000
-2.0000 2.00
4.00
-4.17% 4.17%
18
52
49.3333
2.6667
2.67
7.11
5.13%
19
48
50.3333
-2.3333 2.33
5.44
-4.86% 4.86%
20
49
49.3333
-0.3333 0.33
0.11
-0.68% 0.68%
21
48
49.6667
-1.6667 1.67
2.78
-3.47% 3.47%
22
47
48.3333
-1.3333 1.33
1.78
-2.84% 2.84%
23
50
48.0000
2.0000
2.00
4.00
4.00%
4.00%
24
53
48.3333
4.6667
4.67
21.78
8.81%
8.81%
25
52
50.0000
2.0000
2.00
4.00
3.85%
3.85%
26
47
51.6667
-4.6667 4.67
21.78
-9.93% 9.93%
27
50
50.6667
-0.6667 0.67
0.44
-1.33% 1.33%
28
47
49.6667
-2.6667 2.67
7.11
-5.67% 5.67%
29
52
48.0000
4.0000
4.00
16.00
7.69%
7.69%
30
51
49.6667
1.3333
1.33
1.78
2.61%
2.61%
0.17
2.17
7.12
0.00
0.04
average
RMSE

2014 / 2015
abs error sq error
4.67
3.67
% error abs % error
1.36%
8.81%
6.92%
0.65%
5.13%
2.668209

Page 30

d) Forecast of observation 31 is
47 + 52 + 51
= 50
3
e)
See table headed Moving Average Period 7 on the next page.
Sales and moving average forecast (period 7)

56
54
52
50
Series1
For
Series2
48
46
44
1
9 11 13 15 17 19 21 23 25 27 29
f) To limit the impact of short-term fluctuations on the forecast choose a larger value
of k, i.e. k=7. This has the effect of smoothing out the fluctuations in the data.

2014/15

time sales forecast (p7) error
2014 / 2015
abs error sq error
% error abs % error
48
49
48
48
49
54
49
50
49.2857
0.7143
0.71
0.51
1.43%
47
49.5714
-2.5714 2.57
6.61
-5.47% 5.47%
10
48
49.2857
-1.2857 1.29
1.65
-2.68% 2.68%
11
53
49.2857
3.7143
13.80
7.01%
12
47
50.0000
-3.0000 3.00
9.00
-6.38% 6.38%
13
53
49.7143
3.2857
3.29
10.80
6.20%
6.20%
14
50
49.5714
0.4286
0.43
0.18
0.86%
0.86%
15
49
49.7143
-0.7143 0.71
0.51
-1.46% 1.46%
16
51
49.5714
1.4286
1.43
2.04
2.80%
17
48
50.1429
-2.1429 2.14
4.59
-4.46% 4.46%
18
52
50.1429
1.8571
1.86
3.45
3.57%
19
48
50.0000
-2.0000 2.00
4.00
-4.17% 4.17%
20
49
50.1429
-1.1429 1.14
1.31
-2.33% 2.33%
21
48
49.5714
-1.5714 1.57
2.47
-3.27% 3.27%
22
47
49.2857
-2.2857 2.29
5.22
-4.86% 4.86%
23
50
49.0000
1.0000
1.00
1.00
2.00%
2.00%
24
53
48.8571
4.1429
4.14
17.16
7.82%
7.82%
25
52
49.5714
2.4286
2.43
5.90
4.67%
4.67%
26
47
49.5714
-2.5714 2.57
6.61
-5.47% 5.47%
27
50
49.4286
0.5714
0.57
0.33
1.14%
28
47
49.5714
-2.5714 2.57
6.61
-5.47% 5.47%
29
52
49.4286
2.5714
2.57
6.61
4.95%
4.95%
30
51
50.1429
0.8571
0.86
0.73
1.68%
1.68%
Mean
0.0497
1.9503
4.8305
-0.0008 0.0392
RMSE
Page 31
3.71
1.43%
7.01%
2.80%
3.57%
1.14%
2.197845

Page 32
Exercise 3
b) The first 10 rows of the calculations for = 0.1 are presented below.
time close
73.4375
69.875
forecast (0.1) error
73.4375
abs error sq error
% error abs % error
-3.5625 3.5625
12.69141 -5.10% 5.10%
70.5625 73.0813
-2.5188 2.51875
6.344102 -3.57% 3.57%
70.4375 72.8294
-2.3919 2.391875 5.721066 -3.40% 3.40%
71.125
72.5902
-1.4652 1.465188 2.146774 -2.06% 2.06%
69.8125 72.4437
-2.6312 2.631169 6.923049 -3.77% 3.77%
67.8125 72.1806
-4.3681 4.368052 19.07988 -6.44% 6.44%
66.1875 71.7437
-5.5562 5.556247 30.87188 -8.39% 8.39%
67.875
-3.3131 3.313122 10.97678 -4.88% 4.88%
10
68.8125 70.8568
71.1881
-2.0443 2.04431
4.179203 -2.97% 2.97%
c) The first 10 rows of the calculations when = 0.4 are
time close

2014/15
73.4375
69.875
forecast (0.4) error
73.4375
abs error sq error
% error abs % error
-3.5625 3.5625
12.69141 -5.10% 5.10%
70.5625 72.0125
-1.4500 1.45
2.1025
70.4375 71.4325
-0.9950 0.995
0.990025 -1.41% 1.41%
71.125
0.0905
0.00819
69.8125 71.0707
-1.2582 1.2582
1.583067 -1.80% 1.80%
67.8125 70.5674
-2.7549 2.75492
7.589584 -4.06% 4.06%
66.1875 69.4655
-3.2780 3.277952 10.74497 -4.95% 4.95%
67.875
-0.2793 0.279271 0.077992 -0.41% 0.41%
10
68.8125 68.0426
71.0345
68.1543
0.7699
0.0905
-2.05% 2.05%
0.13%
0.769937 0.592803 1.12%
0.13%
1.12%

Page 33
d) A comparison of the error measurements is as follows
Error measure
=0.1
=0.4
MAE
3.9047
1.8402
RMSE
4.4766
2.34
MAPE
0.0544
0.0259
The forecasts in part c) with =0.4 are preferable as the error measures are
consistently smaller than when =-0.1.
e) This routine in Minitab produces a result which says that the value of the
smoothing constant, , is 0.955. The RMSE = 3.36208 = 1.8336 and the MAE
= 1.44109. Both the RMSE and MAE are lower than those calculated in parts (b)
and (c). This routine in Mi

2014 / 2015


MSO S04 - Exponential Smoothing With Solutions

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