The Many Faces of Time Series Forecasting

The Many Faces of Time Series Forecasting

13 mins read
The Many Faces of Time Series Forecasting
Credits: Slideplayer

Time series forecasting, the process of determining future values of the time series, can be used in any context where the information you have about your data changes over time, such as trends in sales or temperature over a season. 

And there are many methods that can be applied to time series forecasting, such as linear regression and ARIMA models, among others. However, no one forecasting method is ideal for every situation; it’s important to have knowledge of all the possible methods so you can find the one that’s best suited to your situation.

Time series forecasting is a technique for predicting events over time. Predict future events by analyzing past trends, assuming that future trends are similar to past trends. It is used in many research areas of  various applications, including: 

  •  Astronomy 
  •  business plan 
  •  Control technology 
  •  Earthquake prediction 
  •  Econometrics 
  •  Mathematical finance 
  •  Pattern recognition 
  •  Resource allocation 
  •  Signal processing 
  •  statistics 
  •  weather forecast

Time series analysis and time series forecasting 

 Time series analysis is  about understanding a dataset, but prediction is  about predicting it. Time series analysis includes methods of analyzing time series data  to extract meaningful statistics and other characteristics of the data. 

Time series forecasting is the use of a model to predict future values ​​based on previously observed values. 

 The three aspects of predictive modeling are: 

 Sample data: Data collected to illustrate problems with known relationships between inputs and outputs.

 Model training: Use the algorithms you apply to the sample data to create a model that you can  use again and again later. 

Make Predictions: Apply the trained model to new data for which you do not know the output.

An Auto-Loss Model

Credits: schematic

Time series forecasting is the process of using a model to predict future values based on previously observed values. 

This type of forecasting is often used in areas such as weather, stock market prices, sales, and demand. Auto-Loss models are one type of time series forecasting model. This model is based on the assumption that there is a relationship between the past and future values of a time series. 

The model uses this relationship to forecast future values. In order for an auto-loss model to be useful, it needs three things: firstly, data needs to have been collected over a long period of time; secondly, enough data needs to exist so that you can detect patterns; thirdly, these patterns need to be statistically significant. 

These three requirements usually make an auto-loss model impractical or difficult because they are very strict requirements which require considerable resources.

A Step Ahead Method

Most businesses need to forecast future demand in order to make sound strategic decisions. The goal of time series forecasting is to use historical data to identify patterns and trends that can be used to predict future demand. 

There are many different methods that can be used for time series forecasting, but the most popular method is the A Step Ahead Method. 

This method is based on the principle that the best predictor of future demand is past demand. The A Step Ahead Method uses historical data to identify patterns and trends, and then uses these patterns and trends to predict future demand.

An ARIMA Model

Credits: Dukemodel ( apologize for the murky image )

ARIMA models are a type of time series forecasting model. They are used to predict future values based on past values. 

ARIMA models are a type of linear regression model. They are made up of three parts: the autoregressive part, the moving average part, and the integrated part. The autoregressive part is used to model the past values. 

The moving average part is used to model the error. The integrated part is used to model the trend. One benefit of using an ARIMA model is that it provides forecasts for both level (the forecast value) and rate (the forecast growth). An example of an ARIMA model can be seen below: 

AR(p)=B0+B1*(I-1)+epsilon where epsilon is white noise with zero mean and constant variance 

MA(q)=C0+C1*I+D0*I2+epsilon where epsilon has been modified as before

Model Diagnostics

There are many different types of time series forecasting models, each with its own strengths and weaknesses. Knowing which model to use for your data is important, but equally important is understanding how to diagnose problems with your model. 

In this post, we’ll explore some common model diagnostics and how to interpret them. 

When analyzing residuals, you should examine the following: 

– The pattern of the residuals (e.g., random walk) 

– The shape of the distribution (e.g., skewed or fat-tailed) 

– The location on the x-axis (e.g., overly persistent) 

– The correlations between observations in neighboring points in time 

Model diagnostic plots can help you identify if your model has issues such as overfitting or underfitting by highlighting patterns that may indicate a problem with your choice of forecast model or input variables

Trend Estimation

There are many ways to estimate trends in data. The most common method is to fit a line to the data. 

This can be done using ordinary least squares regression, which minimizes the sum of squared residuals.

 However, this method can be biased if the data are not evenly spaced in time. Another method is to use a moving average, which smooths out the data and gives a more accurate representation of the underlying trend. 

It can also reduce autocorrelation by eliminating periods of high variability in the data (e.g., when there was little or no precipitation). An exponential smoothing algorithm is also used to forecast future values based on past values.

It requires some initial input from the user about how much weight should be given to recent events versus those further back in time; for example, one could specify that there should be four times as much weight on recent events than on past events that occurred four years ago.

Seasonal Adjustment

Time series data is often affected by seasonality, which can make forecasting difficult. Seasonal adjustment is a statistical technique that can be used to remove the effects of seasonality from time series data. This can make it easier to identify underlying trends and patterns. 

There are several different methods of seasonal adjustment, and choosing the right one can be tricky. But with a little trial and error, you should be able to find a method that works well for your data. 

The two most common methods of seasonal adjustment are X-12-ARIMA and X-13-ARIMA-SEATS. The first one is designed for unadjusted monthly data, while the second one is designed for seasonally adjusted monthly data.

Another popular option is TRAMO/SEATS, which stands for Trend estimation based on ARIMA Models/Seasonal Estimation Based on ARIMA Models – SEATS. It’s important to choose a model that makes sense for your particular situation.

Monte Carlo Simulation and Sensitivity Analysis

Credits: Monte Carlo Simulations

Monte Carlo Simulation (MCS) is a statistical technique that can be used to understand the impact of risk and uncertainty in financial, project management, and other forecasting models. 

Sensitivity analysis is used to identify the factors that have the most impact on the outcome of a model. 

MCS can be used to generate multiple scenarios based on different assumptions about these factors, and sensitivity analysis can be used to identify which factors are most important in determining the final outcome. 

Time series forecasting is a complex task, and MCS and sensitivity analysis can be powerful tools for understanding the risks and uncertainties involved. 

In many cases, forecasts will need to account for variability such as: fluctuations in prices due to changes in supply and demand; unpredictable events like war or natural disasters; or periods of high volatility like market crashes.

When undertaking time series forecasting, MCS and sensitivity analysis should be considered to better anticipate and respond to these potential risks.

Decompositional Method 

There are many different ways to approach time series forecasting. One popular method is the decompositional method, which involves breaking down the data into its component parts: trend, seasonality, and noise.

This approach can be useful for understanding the underlying drivers of the data and for making more accurate predictions. 

The first step in this process is to estimate a linear model that only includes the trend as a predictor. Using these estimates, one can then estimate a model that includes both the trend and seasonal effects. 

The final step in this process would involve adding other explanatory variables to account for any remaining unexplained variation in the data.

An important consideration when using this approach is determining how long it will take before trends in either future or past observations are no longer relevant because they have converged or become insignificant.

Another consideration is determining how far ahead forecasts should go so that forecasts rely less on older data points that may no longer be relevant for current events (e.g., what will happen at this point in time).

Moving average model 

 In time series analysis, the moving average model (MA model), also known as the moving average process, is a common approach for modeling univariate time series.

The moving average model shows that the output variables are linearly dependent on the present and various past values ​​of the stochastic (incompletely predictable) term. 

 Along with the autoregressive (AR) model (see below), the moving average model is a special case and an important component of the more common ARMA and ARIMA models of time series with more complex stochastic structures. 

 In contrast to the AR model, the finite MA model is always stationary.

Leave a Reply

Your email address will not be published.

Latest from Blog