Holt’s exponential smoothing

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Presentation transcript:

Holt’s exponential smoothing

Holt’s Exponential smoothing Holt’s two parameter exponential smoothing method is an extension of simple exponential smoothing. It adds a growth factor (or trend factor) to the smoothing equation as a way of adjusting for the trend.

Holt’s Exponential smoothing Three equations and two smoothing constants are used in the model. The exponentially smoothed series or current level estimate. The trend estimate. Forecast m periods into the future.

Holt’s Exponential smoothing Ft+1 = Smoothed value for period t+1  = smoothing constant for the level. Xt = Actual value now in period t. Ft = Forecast (smoothed) value for the time period Tt+1 = Trend estimate  = smoothing constant for trend estimate bt = estimate of the slope of the series at time t m = Number of periods ahead to be forecast. H t+m = Holt’s forecast value for the period t+m

Holt’s Exponential smoothing The weight  and  can be selected subjectively or by minimizing a measure of forecast error such as RMSE. Large weights result in more rapid changes in the component. Small weights result in less rapid changes.

Holt’s Exponential smoothing The initialization process for Holt’s linear exponential smoothing requires two estimates: One to get the first smoothed value for L1 The other to get the trend b1. One alternative is to set L1 = y1 and

Example:Quarterly sales of saws for Acme tool company The following table shows the sales of saws for the Acme tool Company. These are quarterly sales From 1994 through 2000.

Example:Quarterly sales of saws for Acme tool company Examination of the plot shows: A non-stationary time series data. Seasonal variation seems to exist. Sales for the first and fourth quarter are larger than other quarters.

Example:Quarterly sales of saws for Acme tool company The plot of the Acme data shows that there might be trending in the data therefore we will try Holt’s model to produce forecasts. We need two initial values The first smoothed value for L1 The initial trend value b1. We will use the first observation for the estimate of the smoothed value L1, and the initial trend value b1 = 0. We will use  = .3 and =.1.

Example:Quarterly sales of saws for Acme tool company

Example:Quarterly sales of saws for Acme tool company RMSE for this application is:  = .3 and = .1 RMSE = 155.5 The plot also showed the possibility of seasonal variation that needs to be investigated.