ETW3420 Principles of Forecasting and Applications
Principles of Forecasting and Applications
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Topic 5 Pre-tutorial Activity
In this pre-tutorial activity, you will:
(i) Apply the simple exponential smoothing method in Microsoft Excel and use Solver to
estimate the smoothing parameter.
(ii) Apply a trend method in Microsoft Excel and use Solver to estimate the smoothing
parameters.
Before attempting the following question, please watch the following videos:
(i) Simple exponential smoothing: http://www.youtube.com/watch?v=6P-qGU8EYmI.
In this video, Goal Seeker was used to estimate the smoothing parameter, α. You may
refer to the second video to see how Solver could be used to estimate α instead.
(ii) Holt’s linear method: https://www.youtube.com/watch?v=x-hxg4pE-Ns. In this
video, Solver was used to estimate the smoothing parameters, α and β.
Question 1
Use the data in the worksheet “Paper” in the Excel file for this question.
(a) Plot a time series of the data.
(b) Divide the data into a training set (Obs 1 to 40) and a test set (Obs 41 to 48).
(c) Using the training set data, use the simple exponential smoothing method and Solver
to estimate the value of the smoothing parameter α that minimizes RMSE.
(d) Using the estimated value of α, produce the out-of-sample forecasts for the test set
period (i.e. Obs 41 to 48).
(e) Plot the out-of-sample forecasts with the actual test set values and comment on the
forecasting accuracy of the simple exponential smoothing method.
Question 2
Use the data in the worksheet “CPI” in the Excel file for this question.
(a) Plot a time series of the data.
(b) Divide the data into a training set (Jan 1985 – Dec 2005) and a test set (Jan 2006 to
Dec 2007).
(c) Using the training set data, use the Holt’s linear method and Solver to estimate the
values of the smoothing parameters α and β that minimize RMSE.
(d) Using the estimated values of α and β, produce the out-of-sample forecasts for the test
set period (i.e. Jan 2006 to Dec 2007).
(e) Plot the out-of-sample forecasts with the actual test set values and comment on the
forecasting accuracy of the Holt’s linear method.
Question 1
Question 2
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