Exponential Smoothing - Double Exponential Smoothing

Double Exponential Smoothing

Simple exponential smoothing does not do well when there is a trend in the data. In such situations, several methods were devised under the name "double exponential smoothing".

One method, sometimes referred to as "Holt-Winters double exponential smoothing" works as follows:

Again, the raw data sequence of observations is represented by {xt}, beginning at time t = 0. We use {st} to represent the smoothed value for time t, and {bt} is our best estimate of the trend at time t. The output of the algorithm is now written as Ft+m, an estimate of the value of x at time t+m, m>0 based on the raw data up to time t. Double exponential smoothing is given by the formulas

\begin{align} s_1& = x_0\\ b_1& = x_1 - x_0\\ \end{align}

And for t > 1 by

\begin{align} s_{t}& = \alpha x_{t} + (1-\alpha)(s_{t-1} + b_{t-1})\\ b_{t}& = \beta (s_t - s_{t-1}) + (1-\beta)b_{t-1}\\ \end{align}

where α is the data smoothing factor, 0 < α < 1, and β is the trend smoothing factor, 0 < β < 1.

To forecast beyond x_t

\begin{align} F_{t+m}& = s_t + mb_t \end{align}

Setting the initial value b0 is a matter of preference. An option other than the one listed above is (xn - x0)/n for some n > 1.

Note that F0 is undefined (there is no estimation for time 0), and according to the definition F1=s0+b0, which is well defined, thus further values can be evaluated.

A second method, referred to as either Brown's linear exponential smoothing (LES) or Brown's double exponential smoothing works as follows.

\begin{align} s'_0& = x_0\\ s''_0& = x_0\\ s'_{t}& = \alpha x_{t} + (1-\alpha)s'_{t-1}\\ s''_{t}& = \alpha s'_{t} + (1-\alpha)s''_{t-1}\\ F_{t+m}& = a_t + mb_t, \end{align}

where at, the estimated level at time t and bt, the estimated trend at time t are:

\begin{align} a_t& = 2s'_t - s''_t\\ b_t& = \frac \alpha {1-\alpha} (s'_t - s''_t). \end{align}

Read more about this topic:  Exponential Smoothing

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