SEPTEMBER

2021
This Business Report

shall provide detailed

TIME SERIES explanation of how we

approached each problem

FORECASTING
given in the assignment. It

shall also provide relative

resolution and explanation

BUSINESS REPORT with regards to the

THAKUR ARUN SINGH

problems
CONTENTS
Problem 1:.......................................................................................................................................... 2
Problem 1.1 .................................................................................................................................... 2
Problem 1.2 .................................................................................................................................... 4
Problem 1.3 .................................................................................................................................. 11
Problem 1.4 .................................................................................................................................. 12
Problem 1.5 .................................................................................................................................. 18
Problem 1.6 .................................................................................................................................. 25
Problem 1.7 .................................................................................................................................. 31
Problem 1.8 .................................................................................................................................. 36
Problem 1.9 .................................................................................................................................. 37
Problem 1.10 ................................................................................................................................ 40

1
Problem 1:
For this particular assignment, the data of different types of wine sales in the 20th century is to be
analyzed. Both of these data are from the same company but of different wines. As an analyst in the
ABC Estate Wines, you are tasked to analyze and forecast Wine Sales in the 20th century..

PROBLEM 1.1
Read the data as an appropriate Time Series data and plot the data.

Resolution:

First, we import all the necessary libraries seaborn, numpy, pandas, sklearn etc to perform our analysis

Next, we import the data set “Sparkling” and “Rose”

Sparkling Dataset

2
Rose Dataset

3
PROBLEM 1.2
Perform appropriate Exploratory Data Analysis to understand the data and also perform decomposition.

Resolution:

4
5
Below Pivot shows the sales made for a month in particular year:

Sparkling
Month 1 2 3 4 5 6 7 8 9 10 11 12
Year
1980 1686 1591 2304 1712 1471 1377 1966 2453 1984 2596 4087 5179
1981 1530 1523 1633 1976 1170 1480 1781 2472 1981 2273 3857 4551
1982 1510 1329 1518 1790 1537 1449 1954 1897 1706 2514 3593 4524
1983 1609 1638 2030 1375 1320 1245 1600 2298 2191 2511 3440 4923
1984 1609 1435 2061 1789 1567 1404 1597 3159 1759 2504 4273 5274
1985 1771 1682 1846 1589 1896 1379 1645 2512 1771 3727 4388 5434
1986 1606 1523 1577 1605 1765 1403 2584 3318 1562 2349 3987 5891
1987 1389 1442 1548 1935 1518 1250 1847 1930 2638 3114 4405 7242
1988 1853 1779 2108 2336 1728 1661 2230 1645 2421 3740 4988 6757
1989 1757 1394 1982 1650 1654 1406 1971 1968 2608 3845 4514 6694
1990 1720 1321 1859 1628 1615 1457 1899 1605 2424 3116 4286 6047
1991 1902 2049 1874 1279 1432 1540 2214 1857 2408 3252 3627 6153
1992 1577 1667 1993 1997 1783 1625 2076 1773 2377 3088 4096 6119
1993 1494 1564 1898 2121 1831 1515 2048 2795 1749 3339 4227 6410
1994 1197 1968 1720 1725 1674 1693 2031 1495 2968 3385 3729 5999
1995 1070 1402 1897 1862 1670 1688 2031 NaN NaN NaN NaN NaN
6
Rose
Month 1 2 3 4 5 6 7 8 9 10 11 12
Year
1980 112 118 129 99 116 168 118 129 205 147 150 267
1981 126 129 124 97 102 127 222 214 118 141 154 226
1982 89 77 82 97 127 121 117 117 106 112 134 169
1983 75 108 115 85 101 108 109 124 105 95 135 164
1984 88 85 112 87 91 87 87 142 95 108 139 159
1985 61 82 124 93 108 75 87 103 90 108 123 129
1986 57 65 67 71 76 67 110 118 99 85 107 141
1987 58 65 70 86 93 74 87 73 101 100 96 157
1988 63 115 70 66 67 83 79 77 102 116 100 135
1989 71 60 89 74 73 91 86 74 87 87 109 137
1990 43 69 73 77 69 76 78 70 83 65 110 132
1991 54 55 66 65 60 65 96 55 71 63 74 106
1992 34 47 56 53 53 55 67 52 46 51 58 91
1993 33 40 46 45 41 55 57 54 46 52 48 77
1994 30 35 42 48 44 45 46 46 46 51 63 84
1995 30 39 45 52 28 40 62 NaN NaN NaN NaN NaN

Yearly Boxplots

7
Monthly Boxplots

8
Additive Decomposition:

Sparkling:

9
Rose:

Multiplicative:

Sparkling:

10
Rose:

Summary Sparkling Dataset:

 Sparkling dataset doesn’t show a visible trend however it shows seasonality, also if observed from
additive decomposition the residual is catching some pattern.
 Multiplicative decomposition on the other hand seems to dictate on the series as the scale of the residual
plot had decreased considerably
 Monthly bar plots showed that the sales are higher towards the last months than the earlier.

Summary Rose Dataset:

 Rose dataset show a clear decreasing trend as well as seasonality, multiplicative decomposition
 dictates the series the noise is reduced considerably in it also the seasonal patterns increase
and decrease in the size across difference years
 The sales tend to go up during the July-August and also during end of the year.

PROBLEM 1.3

Split the data into training and test. The test data should start in 1991.
11
Resolution:

PROBLEM 1.4

Build various exponential smoothing models on the training data and evaluate the model using RMSE
on the test data.

Other models such as regression, naïve forecast models, simple average models etc. should also be
built on the training data and check the performance on the test data using RMSE

Resolution:

βy c
12
13
 c y

For this particular naive model, we say that the prediction for tomorrow is the same as today and the prediction for
day after tomorrow is tomorrow and since the prediction of tomorrow is same as today, therefore the prediction for
day after tomorrow is also today.

14
Method 3: Simple Average:

For this particular simple average method, we will forecast by using the average of the training values.

15
Method 4: Moving Average(MA)

For the moving average model, we are going to calculate rolling means (or moving averages) for different
intervals. The best interval can be determined by the minimum error. The below plot shows the forecast for
different rolling means:

16
Method 5: Exponential Smoothing methods

Exponential smoothing methods consist of flattening time series data. Exponential smoothing averages or
exponentially weighted moving averages consist of forecast based on previous periods data with exponentially
declining influence on the older observations.

Simple Exponential Smoothing (SES): The simplest of the exponentially smoothing methods is naturally called
simple exponential smoothing (SES). This method is suitable for forecasting data with no clear trend or seasonal
pattern. In Single ES, the forecast at time (t + 1) is given by Winters, 1960

t αYt ( −α) t Parameter α is called the smoothing constant and its value lies between 0 and 1. Since the
model uses only one smoothing constant, it is called Single Exponential Smoothing.

Sparkling data doesn't show visible trend however it shows seasonality, Rose data on the other hand shows both
trend and seasonality, all the Exponential models will still be built on both the datasets.

Double Exponential Smoothing(DES): One of the drawbacks of the simple exponential smoothing is that the
model does not do well in the presence of the trend. This model is an extension of SES known as Double
Exponential model which estimates two smoothing parameters. Applicable when data has Trend but no
seasonality. Two separate components are considered: Level and Trend. Level is the local mean. One smoothing
parameter α corresponds to the level series A second smoothing parameter β corresponds to the trend series.
Double Exponential Smoothing uses two equations to forecast future values of the time series, one for forecasting
the short term average value or level and the other for capturing the trend.

ntercept or evel equation, t is given by t αyt ( −α) t Trend equation is given by

Tt β( t− t− ) ( −β)Tt− Here, α and β are the smoothing constants for level and trend, respectively,

0 <α < and 0 < β < .

The forecast at time t + 1 is given by

t t Tt t n t nTt

Though our Sparkling data doesn't seem to have a visible trend we are still going to build this model for the
project. Rose data has a clear trend from the plot above

Inference

 Here, we see that the Double Exponential Smoothing model has picked up the trend component as well
(see the below fig.)
 Our data has seasonality too so we will include one more smoothing parameter for seasonality which is
gamma.
 We will use ETS (A, A, A) Holt Winter's linear method with additive trend and seasonality for Sparkling
data and ETS (A, A, M) Holt Winter's linear method with additive trend and multiplicative seasonality for
Rose wine data. We will call it Triple Exponential Smoothing (TES)
17
PROBLEM 1.5

Check for the stationary of the data on which the model is being built on using appropriate statistical
tests and also mention the hypothesis for the statistical test. If the data is found to be non-stationary,
take appropriate steps to make it stationary. Check the new data for stationary and comment.
18
Note: Stationary should be checked at alpha = 0.05.

Resolution:

Sparkling Train set:

19
Sparkling Test set:

Since the Null Hypothesis H0 : The series is non-stationary Alternate Hypothesis H1: The series is stationary

We cannot reject the null as the p values for both of series is greater than 0.05 (significance level) from the
Augmented Dickey Fuller test above
20
Differenced Sparkling Train set:

21
Differenced Sparkling Test set:

We can now see that the p –value < than 0.05 so we can reject the null-hypothesis and accept the alternate. So
we say the series is stationary.
22
Rose Train Set:

23
Rose Test Set:

Since the Null Hypothesis H0: The series is non-stationary Alternate Hypothesis H1: The series is stationary we
cannot reject the null as the p values is greater than 0.05 (significance level) from the Augmented Dickey Fuller
test above Train set of Rose Wine dataset, on the contrary we can reject the null as the p values is less than 0.05
(significance level) from the Augmented Dickey Fuller test above Test set of Rose Wine dataset

We can correct the non-stationary by using multiple methods like taking differences at various level, using logged
transformed series etc.

Here we will take difference of level 1 of the original train series and we will use the train dataset as is.
24
Differenced Rose Train set:

PROBLEM 1.6

Build an automated version of the ARIMA/SARIMA model in which the parameters are selected using
the lowest Akaike Information Criteria (AIC) on the training data and evaluate this model on the test
data using RMSE.

Resolution:

ARIMA

AIC score for both Sparkling and Rose wine dataset for different models is below:
25
An automated model of (2,1,2) will be built on sparkling wine data and (0,1,2) on rose wine data. Both are of
difference order 1.

26
27
From the ACF plot we see a significant seasonal correlation after every 11th interval Setting the seasonality as 12
for the first iteration of the auto SARIMA model.

AIC scores for SARIMAX model

28
An automated SARIMA model of (3,1,2) will be built on sparkling wine data and (3,1,1) on rose wine data. both
are of difference order 1 and seasonality 12.

Sparkling Data:

Note:

[1] Covariance matrix calculated using the outer product of gradients (complex-step).

[2] Covariance matrix is singular or near-singular, with condition number 2.3e+26. Standard errors may be
unstable.

Rose Data:

29
Note:

[1] Covariance matrix calculated using the outer product of gradients (complex-step)

Diagnostic plots for Auto SARIMA model are as below:

Sparkling Data:

Rose Data:

30
Sparkling Dataset Diagnostic:

From the diagnostic plots we see that the assumptions of Normality, heteroscedasticity as seems to be getting
satisfied as well the series show randomness and no auto correlation between the residuals

Rose Dataset Diagnostic:

The plot shows randomness of the residual also the assumption of normality and heteroscedasticity is satisfied,
it shows no auto correlation until lag 5, then shows a rise in significance at 6.

Though visual plots satisfy most assumptions the test proves it wrong seen from the summary of SARIMAX
model for both the dataset.

PROBLEM 1.7

Build ARIMA/SARIMA models based on the cut-off points of ACF and PACF on the training data and
evaluate this model on the test data using RMSE.

Resolution:

ARIMA

Sparkling Dataset:

31
Rose Dataset:

32
 Here, we have taken alpha=0.05.
 The Auto-Regressive parameter in an ARIMA model is 'p' which comes from the significant lag before
which the PACF plot cuts-off to 0. The Moving-Average parameter in an ARIMA model is 'q' which comes
from the significant lag before the ACF plot cuts-off to 0.
 By looking at the above plots for Sparkling data, we can say that both the PACF cuts off at 3 and ACF
plot cuts-off at lag 2.
 By looking at the above plots for Rose data, we can say that PACF cuts off at 4 and ACF plot cuts-off at
lag 2.

33
34
AIC for sparkling data is the lowest for the model (3,1,2), also we saw the from ACF and PACG plots that the cut
off of p and q are at 3 and 2 resp. so we conclude that the auto SARIMAX and the manual SARIMAX models are
the same.
35
SARIMA

For Rose data let's build a model at the p and q cut off at 4, 2 respectively.

Manual SARIMAX Summary on Rose data:

PROBLEM 1.8

Build a table with all the models built along with their corresponding parameters and the respective
RMSE values on the test data.

Resolution:
36
PROBLEM 1.9

Based on the model-building exercise, build the most optimum model(s) on the complete data and
predict 12 months into the future with appropriate confidence intervals/bands.

Resolution:

For Sparkling dataset, we see that Triple Exponential smoothing gives the best forecast, so we will move forward
with that for forecasting

37
For Rose dataset rolling avg shows the best RMSE, however since the window chosen was very small(2,4,6,9) it
was natural it was going to work well on Test set. The other model which gave the best RMSE was TES and
Manual SARIMAX (4,1,2)(3,0,2,12). We will built a final model on the entire Rose dataset using SARIMAX.
38
39
PROBLEM 1.10

Comment on the model thus built and report your findings and suggest the measures that the company
should be taking for future sales.

Resolution:

Sparkling Wine data:

 TES (Triple Exponential Smoothing) has worked the best for the forecast with lowest RMSE on test data
 You can see from the above chart that the forecast for next 12 months is slightly over the sales of the
previous 12 months however, there isn't a considerable increase.
 Observed from the month wise bar plots previously, we can say that the sales of Sparkling wine tend to
go up in last two months probably because it's a holiday season than the rest and its lowest around Jun
and July
 ABC can take various measures to increase the sales towards the beginning and mid of the year, it can
introduce promotional activities or discounts during the low sales period.
 ABC can tie up with events like concerts, weddings etc. and do some sponsorships to boost sales during
the slack

Rose Wine data:

 We chose manual SARIMAX model to predict for the Rose wine data. The model was passed the cut offs
found through ACF and PACF plots of q and p respectively and seasonality of 12 as the plots showed a
patterned significance after 11 lags.
 You can see from the above plot for Rose wine data the forecast for 1996 is more or less same as of for
1995.
 Observed from the monthly bar plot sales shows an increasing trend from August towards December, it’s
on the lower side beginning of the year
 ABC can take sought promotional activities and implement some discounts during the first half of the year
40
The End

Thakur Arun Singh

*****************************^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^**************************

41