A Study On Business Forecasting Statistics Essay

A Study On Business Forecasting Statistics EssayThe aim of this report is to show my dread of business forecasting using info which was drawn from the UK national statistics. It is a quarterly series of total consumer character gross lending in the UK from the mo quarter 1993 to the second quarter 2009.The report answers four key questions that are relevant to the coursework.In this persona the entropy will be examined, looking for seasonal effects, trends and cycles. Each measure period represents a single piece of data, which essential be split into trend-cycle and seasonal effect. The line graph in Figure 1 identifies a clear upward trend-cycle, which must be take so that the seasonal effect can be predicted.Figure 1 displays long-term realization lending in the UK, which has recently been hit by an economic crisis. Figure 2 also proves there is evidence of a trend because the ACF values do not come down to zero. Even though the trend is clear in Figure 1 and 2 the seas onal approach pattern is not. Therefore, it is important the trend-cycle is completed so the seasonal effect can be estimated clearly. Using a process c exclusivelyed differencing will remove the trend whilst keeping the pattern.Drawing decomposeing plots and cypher correlation coefficients on the differenced data will reveal the pattern repeat.Scatter Plot correlationThe following diagram (Figure 3) represents the correlation between the original opinion lending data and four lags (quarters). A strong correlation is represented by is showed by a straight-line relationship.As depicted in Figure 3, the scatter plot diagrams show that the credit lending data against lag 4 represents the best straight line. Even though the last diagram represents the straightest line, the seasonal pattern is still unclear. Therefore differencing must be employ to resolve this issue.DifferencingDifferencing is employ to remove a trend-cycle component. Figure 4 results display an ACF graph, which indicates a four-point pattern repeat. Moreover, systema skeletale 5 shows a line graph of the eldest difference. The graph displays a four-point repeat but the trend is still clearly apparent. To remove the trend all in all the data must differenced a second time. First differencing is a useful tool for removing non-stationary. However, first differencing does not always eliminate non-stationary and the data may book to be differenced a second time. In practice, it is not essential to go beyond second differencing, because real data generally involve non-stationary of all the first or second level.Figure 6 and 7 displays the second difference data. Figure 6 displays an ACF graph of the second difference, which reinforces the idea of a four-point repeat. dish to say, predict 7 proves the trend-cycle component has been completely removed and that there is in fact a four-point pattern repeat.Question 2Multiple relapse involves fitting a analog expression by minimising the sum of squared deviations between the sample data and the fitted model. There are several models that reasoning backward can fit. Multiple regression can be implemented using elongate and nonlinear regression. The following section explains multiple regression using pot inconstants.Dummy variables are used in a multiple regression to fit trends and pattern repeats in a holistic way. As the credit lending data is at a time seasonal, a common method used to handle the seasonality in a regression framework is to use dummy variables. The following section will include dummy variables to indicate the quarters, which will be used to indicate if there are any quarterly influences on gross sales. The three new variables can be define Q1 = first quarter Q2 = second quarter Q3 = third quarterTrend and seasonal models using model variablesThe following comparisons are used by SPSS to relieve oneself different outputs. Each model is judged in terms of its adjusted R2.Linear trend + seasona l modelData = a + c time + b1 x Q1 + b2 x Q2 + b3 x Q3 + misplayQuadratic trend + seasonal modelData = a + c time + b1 x Q1 + b2 x Q2 + b3 x Q3 + errorCubic trend + seasonal modelData = a + c time + b1 x Q1 + b2 x Q2 + b3 x Q3 + errorInitially, data and time columns were inputted that displayed the trends. Moreover, the sales data was regressed against time and the dummy variables. Due to multi-collinearity (i.e. at least one of the variables being completely determined by the others) there was no need for all four variables, just Q1, Q2 and Q3.Linear regressionLinear regression is used to define a line that comes closest to the original credit lending data. Moreover, linear regression finds values for the slope and intercept that find the line that minimizes the sum of the square of the vertical distances between the points and the lines. sit around SummaryModelRR SquareAdjusted R SquareStd. error of the Estimate1.971a.943.9393236.90933Figure 8. SPSS output displaying the adjust ed coefficient of determination R squaredCoefficientsaModelUnstandardized Coefficients standardize CoefficientstSig.BStd. Error important1(Constant)17115.8161149.16614.894.000time767.06826.084.97229.408.000Q1-1627.3541223.715-.054-1.330.189Q2-838.5191202.873-.028-.697.489Q3163.7821223.715.005.134.894Figure 9The adjusted coefficient of determination R squared is 0.939, which is an excellent fit (Figure 8). The coefficient of variable time, 767.068, is positive, indicating an upward trend. All the coefficients are not significant at the 5% level (0.05). Hence, variables must be removed. Initially, Q3 is removed because it is the least significant variable (Figure 9). erst Q3 is removed it is still apparent Q2 is the least significant value. Although Q3 and Q2 is removed, Q1 is still not significant. All the quarterly variables must be removed, therefore, leaving time as the only variable, which is significant.CoefficientsaModelUnstandardized CoefficientsStandardized CoefficientstSig. BStd. ErrorBeta1(Constant)16582.815866.87919.129.000time765.44326.000.97029.440.000Figure 10 The following table (Table 1) analyses the original forecast against the holdback data using data in Figure 10. The following equation is used to calculate the predicted values.Predictedvalues = 16582.815+765.443*time Original DataPredicted Values50878.0060978.5152199.0061743.9550261.0062509.4049615.0063274.8447995.0064040.2845273.0064805.7242836.0065571.1743321.0066336.61Table 1Suffice to say, this model is ineffective at predicting future values. As the original holdback data decreases for each quarter, the predicted values increase during time, showing no significant correlation.Non-Linear regressionNon-linear regression aims to find a relationship between a response variable and one or more explanatory variables in a non-linear fashion. (Quadratic)Model SummarybModelRR SquareAdjusted R SquareStd. Error of the Estimate1.986a.972.9692305.35222Figure 11CoefficientsaModelUnstandardized Coeff icientsStandardized CoefficientstSig.BStd. ErrorBeta1(Constant)11840.9961099.98010.765.000time1293.64275.6811.63917.093.000time2-9.0791.265-.688-7.177.000Q1-1618.275871.540-.054-1.857.069Q2-487.470858.091-.017-.568.572Q3172.861871.540.006.198.844Figure 12The quadratic non-linear adjusted coefficient of determination R squared is 0.972 (Figure 11), which is a slight improvement on the linear coefficient (Figure 8). The coefficient of variable time, 1293.642, is positive, indicating an upward trend, whereas, time2, is -9.079, which is negative. Overall, the positive and negative values indicate a curve in the trend.All the coefficients are not significant at the 5% level. Hence, variables must also be removed. Initially, Q3 is removed because it is the least significant variable (Figure 9). at once Q3 is removed it is still apparent Q2 is the least significant value. Once Q2 and Q3 have been removed it is obvious Q1 is under the 5% level, meaning it is significant (Figure 13).Coeffic ientsaModelUnstandardized CoefficientsStandardized CoefficientstSig.BStd. ErrorBeta1(Constant)11698.512946.95712.354.000time1297.08074.5681.64317.395.000time2-9.1431.246-.693-7.338.000Q1-1504.980700.832-.050-2.147.036Figure 13Table 2 displays analysis of the original forecast against the holdback data using data in Figure 13. The following equation is used to calculate the predicted valuesQuadPredictedvalues = 11698.512+1297.080*time+(-9.143)*time2+(-1504.980)*Q1 Original DataPredicted Values50878.0056172.1052199.0056399.4550261.0055103.5349615.0056799.2947995.0056971.7845273.0057125.9842836.0055756.9243321.0057379.54Table 2Compared to Table 1, Table 2 presents predicted data values that are at hand(predicate) in range, but are not accurate enough.Non-Linear model (Cubic)Model SummarybModelRR SquareAdjusted R SquareStd. Error of the Estimate1.997a.993.9921151.70013CoefficientsaModelUnstandardized CoefficientsStandardized CoefficientstSig.BStd. ErrorBeta1(Constant)17430.277710.19724 .543.000time186.53196.802.2361.927.060time238.2173.8592.8979.903.000time3-.544.044-2.257-12.424.000Q1-1458.158435.592-.048-3.348.002Q2-487.470428.682-.017-1.137.261Q312.745435.592.000.029.977Figure 15The adjusted coefficient of determination R squared is 0.992, which is the best fit (Figure 14). The coefficient of variable time, 186.531, and time2, 38.217, is positive, indicating an upward trend. The coefficient of time3 is -.544, which indicates a curve in trend. All the coefficients are not significant at the 5% level. Hence, variables must be removed. Initially, Q3 is removed because it is the least significant variable (Figure 15). Once Q3 is removed it is still apparent Q2 is the least significant value. Once Q3 and Q2 have been removed Q1 is now significant but the time variable is not so it must also be removed.CoefficientsaModelUnstandardized CoefficientsStandardized CoefficientstSig.BStd. ErrorBeta1(Constant)18354.735327.05956.120.000time245.502.9563.44947.572.000time3-.623 .017-2.586-35.661.000Q1-1253.682362.939-.042-3.454.001Figure 16Table 3 displays analysis of the original forecast against the holdback data using data in Figure 16. The following equation is used to calculate the predicted valuesCubPredictedvalues = 18354.735+45.502*time2+(-.623)*time3+(-1253.682)*Q1 Original DataPredicted Values50878.0049868.6952199.0048796.0850261.0046340.2549615.0046258.5147995.0044786.0845273.0043172.8942836.0040161.5343321.0039509.31Table 3Suffice to say, the cubic model displays the most accurate predicted values compared to the linear and quadratic models. Table 3 shows that the original data and predicted values gradually decrease.Question 3Box Jenkins is used to find a suitable blueprint so that the residuals are as small as possible and exhibit no pattern. The model is built only involving a few steps, which may be repeated as necessary, resulting with a specific formula that replicates the patterns in the series as closely as possible and also produces a ccurate forecasts.The following section will show a combination of decomposition and Box-Jenkins ARIMA approaches.For each of the original variables analysed by the procedure, the Seasonal Decomposition procedure creates four new variables for the modelling data SAF Seasonal factors SAS Seasonally adjusted series, i.e. de-seasonalised data, representing the original series with seasonal variations removed. STC Smoothed trend-cycle component, which is smoothed version of the seasonally adjusted series that shows both trend and cyclical components. ERR The residual component of the series for a particular observation Autoregressive (AR) models can be effectively coupled with moving average (MA) models to form a general and useful class of time series models called autoregressive moving average (ARMA) models,. However, they can only be used when the data is stationary. This class of models can be extended to non-stationary series by allowing differencing of the data series. These are c alled autoregressive integrated moving average (ARIMA) models.The variable SAS will be used in the ARIMA models because the original credit lending data is de-seasonalised. As the data in Figure 19 is de-seasonalised it is important the trend is removed, which results in seasonalised data. Therefore, as mentioned before, the data must be differenced to remove the trend and create a stationary model.Model StatisticsModelNumber of PredictorsModel Fit statisticsLjung-Box Q(18)Number of OutliersStationary R-squaredNormalized BICStatisticsDFSig.Seasonal adjusted series for creditlending from SEASON, MOD_2, MUL EQU 4-Model_10.48514.04018.69315.2280Model StatisticsModelNumber of PredictorsModel Fit statisticsLjung-Box Q(18)Number of OutliersStationary R-squaredNormalized BICStatisticsDFSig.Seasonal adjusted series for creditlending from SEASON, MOD_2, MUL EQU 4-Model_10.47613.87216.57217.4840ARMA (3,2,0) Original DataPredicted Values50878.0050335.2984352199.0050252.0059550261.0050310.44277 49615.0049629.7523347995.00