Business Forecasting: Topic: Backshift Notation

Business Forecasting
TOPIC: BACKSHIFT
NOTATION
What is a Time Series?
Set of evenly spaced numerical data
◦ Obtained by observing response variable at regular time periods
Forecast based only on past values

◦ Assumes that factors influencing past, present, & future will continue
Example
◦ Year: 1995 1996 1997 1998 1999
◦ Sales: 78.7 63.5 89.7 93.2 92.1
Time Series Components
Trend Cyclical
Seasonal Irregular
ARIMA and Backshift Notation
ARIMA models aim to describe the autocorrelations
An approach to time series forecasting
Time series models involve lagged terms and may involve differenced data to account
for trend
There are useful notations used for the same
The ARIMA model introduces the Backshift (Lag) operator
Using Backshift Notation, the ARIMA model equation becomes:
BACKSHIFT OPERATOR
A very useful notational device is the backward shift operator, B, which is used
as follows:
Byt = yt−1 .
In other words, B, operating on yt, has the effect of shifting the data back one
period. Two applications of B to yt shifts the data back two periods:
B(Byt) = B2yt = yt−2 .
For monthly data, if we wish to shift attention to “the same month last year,”
then B12 is used, and the notation is B12yt = yt−12.
First difference: 1−B.
Double difference: (1−B)2.
dth-order difference: (1−B)dyt.
Seasonal difference: 1−Bm.
Seasonal difference followed by a ﬁrst difference: (1−B)(1−Bm).
Multiply terms together together to see the combined effect:
(1−B)(1−Bm)yt = (1−B−Bm + Bm+1)yt = yt −yt−1 −yt−m + yt−m−1.
MOVING AVERAGE
Series of arithmetic means
Provides overall impression of data over time
It is a trend-following, or lagging, indicator because it is based on past values
EXAMPLE
Year Sales MA(3) in 1,000

1995 20,000 NA
1996 24,000 (20+24+22)/3 = 22
1997 22,000 (24+22+26)/3 = 24
1998 26,000 (22+26+25)/3 = 24
1999 25,000 NA
AUTOREGRESSION
Autoregressive models and processes are stochastic calculations in
which future values are estimated based on a weighted sum of past
values.
Used for forecasting trend
AR(1) - Current value is based on the immediately preceding value
Assumes data are correlated with past data values
◦ 1st Order: Correlated with prior period
Statistical Stationarity of Data
1. A S TA T I O N A RY T I M E S E R I E S I S O N E W H O S E S TAT I S T I C A L P R O P E RT I E S S U C H A S
M E A N , VA R I A N C E , A U TO C O R R E L AT I O N , E T C . A R E A L L C O N S TA N T O V E R T I M E .
2. A S TAT I O N A R I Z E D S E R I E S I S R E L AT I V E LY E A S Y TO P R E D I C T: Y O U S I M P LY P R E D I C T
T H AT I T S S TAT I S T I C A L P R O P E RT I E S W I L L B E T H E S A M E I N T H E F U T U R E A S T H E Y
H AV E B E E N I N T H E PA S T.
3. A N O T H E R R E A S O N F O R T RY I N G TO S TAT I O N A R I Z E A T I M E S E R I E S I S TO B E A B L E TO
O B TA I N M E A N I N G F U L S A M P L E S TAT I S T I C S S U C H A S M E A N S , VA R I A N C E S , A N D
C O R R E L AT I O N S W I T H O T H E R VA R I A B L E S . S U C H S TAT I S T I C S A R E U S E F U L A S
D E S C R I P TO R S O F F U T U R E B E H AV I O U R O N LY I F T H E S E R I E S I S S TAT I O N A RY.
4. F O R E X A M P L E , I F T H E S E R I E S I S C O N S I S T E N T LY I N C R E A S I N G O V E R T I M E , T H E
S A M P L E M E A N A N D VA R I A N C E W I L L G R O W W I T H T H E S I Z E O F T H E S A M P L E , A N D
T H E Y W I L L A LWAY S U N D E R E S T I M AT E T H E M E A N A N D VA R I A N C E I N F U T U R E
P E R I O D S . A N D I F T H E M E A N A N D VA R I A N C E O F A S E R I E S A R E N O T W E L L - D E F I N E D ,
T H E N N E I T H E R A R E I T S C O R R E L AT I O N S W I T H O T H E R VA R I A B L E S . F O R T H I S
R E A S O N Y O U S H O U L D B E C A U T I O U S A B O U T T RY I N G TO E X T R A P O L AT E R E G R E S S I O N
M O D E L S F I T T E D TO N O N S TAT I O N A RY D ATA .
First Differencing
1.Most business and economic time series are far from stationary when expressed in their original units of
measurement, and even after deflation or seasonal adjustment they will typically still exhibit trends, cycles,
random-walking, and other non-stationary behaviour.
2.The first difference of a time series is the series of changes from one period to the next.
3.If Yt denotes the value of the time series Y at period t, then the first difference of Y at period t is equal to
Yt-Yt-1.
4.If the first difference of Y is stationary and also completely random (not auto correlated), then Y is
described by a random walk model: each value is a random step away from the previous value.
5.If the first difference of Y is stationary but not completely random--i.e., if its value at period t is auto
correlated with its value at earlier periods--then a more sophisticated forecasting model such as
exponential smoothing or ARIMA may be appropriate.

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Business Forecasting

Forecast based only on past values

Year Sales MA(3) in 1,000

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