Week 4: HES & Trend Fitting

Question 1

HES is used in forecasting when?

Answer 1

When the time series has CHANGES that are generally constant for extended periods

Question 2

HES has what smoothing constants?

Answer 2

• alpha (a)
• beta (b)

Question 3

What do smoothing constants do?

Answer 3

Smooth volatility in the time series, revealing underlying components

Question 4

Are smoothing constants arbitrary?

Answer 4

Yes, they are arbitrary, but within 0-1 (inclusive).

You can select it through trial and error (checking which one has best MSE) or SOLVER in Excel

Question 5

What is trend fitting?

Answer 5

A method where the time series is linked to some function of a time index

Question 6

What method can you use if the time series has trend?

Answer 6

• HES
• A trend fitting approach may be used for prediction

Question 7

How does trend fitting work?

Answer 7

Prediction is based on extrapolation by substitution of the appropriate value for the time index
- Usually linear trend is observed, but it depends on the trend

Question 8

How is a & b estimated in the equation?

Answer 8

estimated by regression of the time series (Y) against time index (t)

Question 9

What is extrapolation?

Answer 9

Estimating something by assuming that existing trends will continue in the future