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QXD 12/28/07 1:14 PM Page 1

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16.9: (Student CD-ROM Topic) The Holt-Winters Method for Trend-Fitting and Forecasting CD16-1

16.9 (STUDENT CD-ROM TOPIC) THE HOLT-WINTERS METHOD

FOR TREND-FITTING AND FORECASTING
The Holt-Winters method extends the exponential smoothing approach described in Section
16.3 by including the future trend. To use the Holt-Winters method at any time period i, you
must continuously estimate the level of the series (i.e., the smoothed value Ei) and the trend
value (Ti). Equations (16.26a) and (16.26b) estimate the level and trend values in the Holt-
Winters method.

The Holt-Winters Method

Level: Ei = U(Ei−1 + Ti−1) + (1 − U)Yi (16.26a)

Trend: Ti = VTi−1 + (1 − V)(Ei − Ei−1) (16.26b)

where
Ei = level of the smoothed series being computed in time period i
Ei−1 = level of the smoothed series already computed in time period i − 1
Ti = value of the trend component being computed in time period i
Ti−1 = value of the trend component already computed in time period i − 1
Yi = observed value of the time series in period i
U = subjectively assigned smoothing constant (where 0 < U < 1)
V = subjectively assigned smoothing constant (where 0 < V < 1)

To begin computations, define E2 = Y2 and T2 = Y2 − Y1 and choose smoothing constants for U

and V. Then compute Ei and Ti for all i years, i = 3, 4, . . . , n.
The choices for the smoothing constants U and V affect the results. Smaller values of U
give more weight to the more recent levels of the time series and less weight to earlier levels in
the series. Smaller values of V give more weight to the current trend in the time series and less
weight to past trends in the series. Larger values of U and V have the opposite effect on the
Holt-Winters method.
To illustrate the Holt-Winters method, return to the time series for the Wm. Wrigley Jr.
Company discussed in Section 16.4 (see Table 16.2). To compute the level and the trend for the
third and fourth years (1986 and 1987) using the selected smoothing constants of U = 0.3 and
V = 0.3, begin by setting

E2 = Y2 = 620

and

T2 = Y2 − Y1 = 620 − 591 = 29

Choosing smoothing constants U = 0.3 and V = 0.3, Equations (16.26a) and (16.26b) become

Ei = (0.3)(Ei−1 + Ti−1) + (0.7)(Yi)

and

Ti = (0.3)(Ti−1) + (0.7)(Ei − Ei−1)

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CD16-2 CHAPTER SIXTEEN Time-Series Forecasting and Index Numbers

For 1986, the third year, i = 3 and

E3 = (0.3)(620 + 29) + (0.7)(699) = 684

and

T3 = (0.3)(29) + (0.7)(684 − 620) = 53.5

For 1987, the fourth year, i = 4 and

E4 = (0.3)(684 + 53.5) + (0.7)(781) = 767.95

and

T4 = (0.3)(53.5) + (0.7)(767.95 − 684.00) = 74.815

Fortunately, you can use Microsoft Excel or Minitab to compute these values. Table 16.7 dis-
plays the calculated values for level and trend for the entire series.

TABLE 16.7 Year Revenue HW Prediction T

Revenues of the Wm. 1984 591 #N/A #N/A
Wrigley Jr. Company 1985 620 620.0000 29.0000
Using the Holt-Winters
1986 699 684.0000 53.5000
Method with U = 0.3
and V = 0.3 1987 781 767.9500 74.8150
1988 891 876.5295 98.4501
1989 993 987.5939 107.2801
1990 1,111 1,106.1622 115.1819
1991 1,149 1,170.7032 79.7333
1992 1,301 1,285.8309 104.5094
1993 1,440 1,425.1021 128.8426
1994 1,661 1,628.8834 181.2997
1995 1,770 1,782.0549 161.6100
1996 1,851 1,878.7995 116.2042
1997 1,954 1,966.3011 96.1124
1998 2,023 2,034.8240 76.7998
1999 2,079 2,088.7871 60.8141
2000 2,146 2,147.0804 59.0495
2001 2,430 2,362.8390 168.7459
2002 2,746 2,681.6754 273.8093
2003 3,069 3,034.9454 329.4318
2004 3,649 3,563.6132 468.8969
2005 4,159 4,121.0530 530.8770
2006 4,686 4,675.7790 547.5713

To use the Holt-Winters method for forecasting, you assume that all future trend move-
ments will continue from the most recent smoothed level En. Thus, you can use Equation
(16.27) to forecast j years into the future.

Using the Holt-Winters Method for Forecasting

Yˆn + j = En + j (Tn )
(16.27)
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16.9: (Student CD-ROM Topic) The Holt-Winters Method for Trend-Fitting and Forecasting CD16-3

where
Yˆn + j = forecast value j years into the future
En = level of the smoothed series computed in the most recent time period n
Tn = value of the trend component computed in the most recent time period n
j = number of years into the future

To illustrate the process of forecasting with the Holt-Winters method, you can forecast rev-
enues for the Wm. Wrigley Jr. Company in 2007 and 2008. Using the values of level and trend
based on smoothing constants of U = 0.3 and V = 0.3 in Table 16.6, from Equation (16.27), the
forecasts of revenues for 2007 and 2008 are
Yˆ = E + j (T )
n+ j n n

2007: 1 year ahead Yˆ24 = E23 + (1)(T23) = 4,675.78 + (1)(547.57) = 5,223.35 millions of dollars
2008: 2 years ahead Yˆ25 = E23 + (2)(T23) = 4,675.78 + (2)(547.57) = 5,770.92 millions of dollars
Figure 16.28 is a time-series plot of the revenues and the forecasted values.

FIGURE 16.28
Plot of the Wm. Wrigley Jr. Company Revenues and Forecasted Revenues Using the
Holt-Winters Method.
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CD16-4 CHAPTER SIXTEEN Time-Series Forecasting and Index Numbers
PROBLEMS FOR SECTION 16.9
Learning the Basics
16.77 Consider an annual time series with 20 consecutive
values. If the smoothed level for the most recent value is
34.2 and the corresponding trend level is 5.6,
a. what is your forecast for the coming year?
b. what is your forecast five years from now?
16.78 Given the following series from n = 15 consecutive
time periods:
3 5 6 8 10 10 12 15 16 13 16 17 22 19 24
Use the Holt-Winters method (with U = 0.30 and V = 0.30)
to forecast the 16th through 20th periods.
16.79 Given the following series from n = 10 consecutive
time periods:
137 125 116 110 103 96 86 79 72 66
Use the Holt-Winters method (with U = 0.20 and V = 0.20)
to forecast the 11th through 14th periods.
Applying the Concepts
16.80 Refer to the data of Problem 16.13 (see the GDP
file) concerning gross domestic product.
a. Forecast gross domestic product for 2007 and 2008 using
the Holt-Winters method with U = 0.30 and V = 0.30.
b. Do (a) with U = 0.70 and V = 0.70.
c. Do (a) with U = 0.30 and V = 0.70.
d. Which of these sets of forecasts would you select, given
the historical movement of the time series? Discuss.
e. Compare the results of (a) through (c) with those of
Problem 16.13(c).
f. Go to the library or the Internet and find the actual gross
domestic product for 2007 and 2008. Which method
provided the best forecasts?
16.81 Refer to the data of Problem 16.15 (see the file
Strategic ) concerning the number of barrels of oil in the
U.S. strategic reserve.
a. Forecast the number of barrels for 2007 using the Holt-
Winters method with U = 0.30 and V = 0.30.
b. Do (a) with U = 0.70 and V = 0.70.
c. Do (a) with U = 0.30 and V = 0.70.
d. Which of these sets of forecasts would you select, given
the historical movement of the time series? Discuss.
e. Compare the results of (a) through (c) with those of
Problem 16.15(f).
f. Go to the library or the Internet and find the actual num-
ber of barrels of oil in the U.S. strategic reserve for
2006. Which method provided the best forecast?
16.82 Refer to the data of Problem 16.16 (see the file
CocaCola ) concerning operating revenue of Coca-Cola.
a. Forecast operating revenues (in billions of constant
1982–1984 dollars) for 2007 and 2008 using the Holt-
Winters method with U = 0.30 and V = 0.30.
b. Do (a) with U = 0.70 and V = 0.70.
c. Do (a) with U = 0.30 and V = 0.70.
d. Which of these sets of forecasts would you select, given
the historical movement of the time series? Discuss.
e. Compare the results of (a) through (c) with those of
Problem 16.16(e).
f. Go to the library or the Internet and find the operating
revenue of Coca-Cola for 2007 and 2008. Which
method provided the best forecasts?
16.83 Refer to the data of Problem 16.17 (see the file
DJIA ) concerning the closing value of the Dow Jones
Industrial Average (DJIA).
a. Forecast the closing value of the Dow Jones Industrial
Average (DJIA) for 2007 using the Holt-Winters method
with U = 0.30 and V = 0.30.
b. Do (a) with U = 0.70 and V = 0.70.
c. Do (a) with U = 0.30 and V = 0.70.
d. Which of these sets of forecasts would you select, given
the historical movement of the time series? Discuss.
e. Compare the results of (a) through (c) with those of
Problem 16.17(f).
f. Go to the library or the Internet and find the actual Dow
Jones Industrial Average (DJIA) for 2007. Which
method provided the best forecast?
16.84 Refer to the data of Problem 16.18 (see the file GE )
concerning the stock price of GE.
a. Forecast the stock price of GE for January 1, 2008 using
the Holt-Winters method with U = 0.30 and V = 0.30.
b. Do (a) with U = 0.70 and V = 0.70.
c. Do (a) with U = 0.30 and V = 0.70.
d. Which of these sets of forecasts would you select, given
the historical movement of the time series? Discuss.
e. Compare the results of (a) through (c) with those of
Problem 16.18(f).
f. Go to the library or the Internet and find the actual stock
price of GE for January 1, 2008. Which method pro-
vided the best forecast?
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16.9: (Student CD-ROM Topic) The Holt-Winters Method for Trend-Fitting and Forecasting
Appendix CD-E16.9
Using Microsoft Excel for the Holt-Winters
Method
You use the Holt-Winters method by making entries in the
HoltWinters worksheet of the Holt-Winters.xls workbook.
This worksheet uses arithmetic formulas to compute both
the level (labeled HW Prediction) and the trend (labeled
T) based on values of the smoothing constants U and V that
you enter in cells B4 and B5. The worksheet also uses IF
functions to validate the entries for the two smoothing con-
CD16-5
stants. (To examine all formulas in this worksheet, open to
the HWFormulas worksheet.)
To adapt these worksheets to other problems, select
row 15 and then right-click and select either Insert or
Delete from the shortcut menu. If you are inserting rows,
copy the row 14 down through the newly inserted rows to
complete the table.