Chapter 4: Seasonal Series:

Forecasting and Decomposition

Arnond Sakworawich, Ph.D.

Graduate School of Applied Statistics
National Institute of Development Administration

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4.1 Components of a Time Series
4.3 Forecasting Using a Seasonal Decomposition
4.4 Pure Decomposition
4.5 The Census X-12 Decomposition
4.6 The Holt-Winters Seasonal Smoothing Methods
4.7 The Multiplicative Holt-Winters Method
4.8 Weekly Data
4.9 Prediction Intervals
4.10 Principles

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 4.1: Components of a Time Series

• A time series is said to have a seasonal component if it

displays a recurrent pattern with a fixed and known
duration [e.g. months of the year, days of the week].

• A time series is said to have a cyclical component if it

displays somewhat regular fluctuations about the trend
but those fluctuations have a periodicity of variable and
unknown duration [e.g. a business cycle – Introduction,
growth, maturity, decline].

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 4.1: Components of a Time Series

• Define T = Trend, S = Seasonal, E = Error

• Additive model: Y  T  S  E

• Multiplicative model: Y  TSE

• Mixed additive-multiplicative model: Y  TS  E

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4.1: Components of a Time Series

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4.2: Forecasting Using a Seasonal Decomposition

• The basic steps in the process are:

1. Generate estimates of the trend by averaging out the
seasonal component.
2. Estimate the seasonal component.
3. Create a deseasonalized series.
4. Forecast the trend and the seasonal pattern separately.
5. Recombine the trend forecast with the seasonal
component to produce a forecast for the original series.

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4.2: Forecasting Using a Seasonal Decomposition

• Pure Decomposition - use all n data points to

estimate the fitted value at each time t (two-sided
decomposition)
-All data (future and past data) are used to predict.
• Forecasting Decomposition - use only the data up to
and including time t to predict value at time t+1 (one-
sided decomposition)
-Only past data are used to predict

Q: Under what circumstances is one approach preferable to the other?

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4.2: Forecasting Using a Seasonal Decomposition

Moving Average

• A (simple) moving average of order K, denoted by

MA(K), is the average of K successive terms in a
time series, taken over successive sets of K, so
that the first average is (Y1  Y2  ...  YK ) / K , the
second is (Y2  Y3  ...  YK 1 ) / K , and so on.

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4.4: Forecasting Using a Seasonal Decomposition

Centered Moving Average

• A centered moving average (CMA) of order K, denoted by CM(t|K),
is defined by taking the average of successive pairs of simple
moving averages. Thus, denote the first average of K terms by
M (t  1| K )  (Yt 1  Yt  2   Yt  K ) / K
and the second one by
M (t | K )  (Yt  Yt 1   Yt  K 1 ) / K
then define the centered MA as
CM (t | K )  [ M (t  1| K )  M (t | K )] / 2.

• When K is odd, it is usually not necessary to calculate a CMA.

However, when K is even, K=2J say, the first average corresponds
to an “average time” of t-J-0.5 and the second to t-J+0.5 so the
centered MA corresponds to time t-J as desired.
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Table 4.3: Forecasting Using a Seasonal Decomposition

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Table 4.3: Forecasting Using a Seasonal Decomposition

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 4.4: Pure Decomposition

1. Calculate the 4-term MA and then the centered MA. The first
CMA term corresponds to period 3 and the last one to period
(t-2); K = 4 so we “lose” two values at each end of the series.
2. Divide [subtract] observations 3, …, (t-2) by [from] their
corresponding CMA to obtain a detrended series.
3. Calculate the average value (across years) of the detrended
series for each quarter j (j = 1, 2, 3, 4) to produce the initial
seasonal factors.
4. Standardize the seasonal factors by computing their average
and then setting the final seasonal factor equal to the initial
value divided by [minus] the overall average.
5. Estimate the error term by dividing the detrended series by the
final seasonal factor [subtracting the final seasonal factor from
the detrended series].
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4.4: Pure Decomposition

Table 4.4:
Multiplicative
Decomposition

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4.6: The Holt-Winters Seasonal Smoothing Methods

• The forecast function includes both local trend and

seasonal components. The additive form is:

F (h)  level (t )  h * trend (t )  seasonal (t  m  h)

t h
 Lt  hTt  S
t mh
o where
 Lt is local estimate of level at time t.
 Tt is local estimate of trend at time t.
 St  m  h is the local estimate of the seasonal effect
[from same ‘month’ last year].
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 4.6.1: The Additive Holt-Winters Method

• When a new observation is recorded, the complete set

of updating equations takes the form:
o Observed error:
et  Yt  Lt 1  Tt 1  St m
o 1-step ahead forecast:
Ft 1 1  Ft 1  Lt  Tt  St m1
o Updating relationships:
Lt  Lt 1  Tt 1   [Yt  Lt 1  Tt 1  St m ]
Tt  Tt 1   [ Lt  Lt 1  Tt 1 ]
St  St m   [Yt  Lt 1  Tt 1  St m ]
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 4.6.1: The Additive Holt-Winters Method

• The updating equations may be expressed in error correction

form:

Lt  L  T   et
t 1 t 1
Tt  T   et
t 1
St  St m   et

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 4.6.1: The Additive Holt-Winters Method

A variety of special cases exists:

o Fixed seasonal pattern: γ = 0 (no seasonal updating)
o No seasonal pattern: γ = 0 and all initial S values are set
equal to zero
o Fixed trend: β = 0
o Zero trend: β = 0 and T0 = 0
o All fixed components: α = β = γ = 0 [leading to the regression
model in Section 9.1.1]

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4.6: The Holt-Winters Seasonal Smoothing Methods

•Starting Values
o Can use the Method of Least Squares to estimate {, ,
} BUT
o Need m+2 starting values [=14 for monthly data];
problematic for short series, so various heuristic methods
are used for the starting values.

Q: Suppose you has three years of monthly data.

How would you specify starting values for the level,
trend and seasonal components?

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Example 4.4 [Table 4.5]

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 Example 4.5: U.S. Auto Sales

Original series
Components
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4.6: The Holt-Winters Seasonal Smoothing Methods

Q: Which method would you use?

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 4.7: The Multiplicative Holt-Winters Method

• The forecast function includes the local trend and

seasonal components as before, but the seasonal effect
is now multiplicative:
Ft h (h)  [level (t )  h * slope(t )]* seasonal (t  m  h)
 [ Lt  hTt ]St mh
• The error correction updating relationships are:

Lt  Lt 1  Tt 1   (et / St  m )
Tt  Tt 1   (et / St  m )
St  St  m   (et / ( Lt 1  Tt 1 ))

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 4.9: Prediction Intervals

• As before, we can define a prediction interval using the

normal distribution as:
Forecast  z 2 *( RMSE )

Q: These intervals are very wide. Why?

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 4.10: Principles

• Examine carefully the structure of the seasonal pattern.

• When there are limited data from which to calculate
seasonal components, consider using the seasonals
from elated data series, such as the aggregate.
Alternatively, average the estimates across similar
products.

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 Take-Aways

• Seasonal series need to be decomposed into trend and

seasonal components.
• The type of decomposition used depends upon whether
we are interested in pure forecasting or smoothing.
• The seasonal component may have either an additive or
a multiplicative interaction with the trend.
• Short series mean that special methods involving the
assumption of common seasonal patterns must be used.

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