Exponential Smoothing#
Exponential smoothing is a popular and widely used method for forecasting in time series analysis. It is a simple and effective technique that can be applied to univariate time series data and involves estimating future values by calculating weighted averages of past observations.
The idea behind exponential smoothing is that more recent observations are more important in determining future values than older observations. To account for this, exponential smoothing methods assign greater weights to more recent observations and reduce the weight of older observations over time. The weights are assigned in an exponential fashion, hence the name exponential smoothing.
Exponential smoothing methods can be broadly classified into three categories: simple exponential smoothing, Holt’s linear exponential smoothing, and Holt-Winters’ exponential smoothing.
Simple Exponential Smoothing: This method involves estimating future values by calculating weighted averages of past observations. The weight of each observation decreases exponentially as the observation gets older. Simple exponential smoothing is suitable for univariate time series data with a stable or slightly increasing trend.
Holt’s Linear Exponential Smoothing: This method extends the simple exponential smoothing method by incorporating a linear trend component into the model. This allows the model to capture linear trends in the data and makes it suitable for time series data with a linear trend.
Holt-Winters’ Exponential Smoothing: This method extends the Holt’s linear exponential smoothing method by incorporating a seasonal component into the model. This allows the model to capture seasonal patterns in the data and makes it suitable for time series data with both a linear trend and a seasonal component.
Example Code#
import numpy as np
import pandas as pd
import statsmodels.api as sm
# Load the data
data = pd.read_csv("data.csv")
# Define the time series and divide it into training and testing sets
ts = data["value"]
ts_train = ts[:int(0.8*len(ts))]
ts_test = ts[int(0.8*len(ts)):]
# Define the Holt Winters model
model = sm.tsa.ExponentialSmoothing(ts_train, seasonal_periods=12, trend="add", seasonal="add").fit()
# Make predictions on the test set
predictions = model.predict(start=len(ts_train), end=len(ts)-1)
# Evaluate the model using Mean Absolute Error (MAE)
mae = np.mean(np.abs(predictions-ts_test))
# Print the MAE
print("Mean Absolute Error:", mae)
In this example, we first load the time series data into a Pandas dataframe, data. We then define the time series ts by selecting the value column from the dataframe. We divide the time series into training and testing sets, ts_train and ts_test, respectively.
Next, we create an instance of the Holt Winters method using the ExponentialSmoothing class from statsmodels.tsa. We pass the training set as input and set the seasonal period to 12 (months) and specify that we want to add both a trend and seasonal component to the model. The fit method is used to fit the model to the training data.
Finally, we make predictions on the test set using the predict method, and evaluate the model using the Mean Absolute Error (MAE) metric. The MAE is calculated by taking the mean of the absolute differences between the true values and the predicted values.
Conclusion#
Exponential smoothing methods are easy to implement, computationally efficient, and require little to no prior knowledge about the underlying data distribution. However, these methods do not account for sudden changes in the data or for outliers.
In conclusion, exponential smoothing methods are a simple and effective technique for forecasting in time series analysis and are widely used in industry for demand forecasting and inventory management. However, it is important to assess the appropriateness of these methods for a given time series data and to consider alternative techniques when necessary.
Where to Learn More#
We cover Exponential Smoothing methods in-depth in the following courses: