ALY 6050 Introduction to Enterprise Analytics - Project: Forecasting Financial Time Series
ALY 6050
Module Three Project
Project: Forecasting Financial Time Series
The project consists of three parts. The submission of this project will consist of two attachments:
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A Word document that is prepared according to the APA standards of formatting. In the Word document, explain the experiments and their respective conclusions, and additional information as indicated in each
problem. Either an Excel workbook or an R script file (.R file) that contains all the work and the calculations indicated in
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parts 1-3 of the project. Please save your Excel workbook or R script file in the following format: ALY6050_MOD3Project_ LastnameFirstinitial; for example, ALY6050_MOD3Project_ HeR.
Project:
The Excel workbook ALY6050_MOD3Project_Data_2024WinterB.csv contains the historical stock prices for Netflix, Inc. (NFLX) and Amazon.com, Inc. (AMZN) for a total time period of one year, consisting of 252 market days.
Part 1: Short-term Forecasting:
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(i) Use a simple line plot of both time series to detect seasonal, irregular, or trend behaviors if any. Write a summary of your observations of both time series in your report.
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(ii) Perform exponential smoothing to forecast both prices for period 253. Use successive values of 0.30, 0,45, 0.60, and 0.75 for the smoothing parameter α. Next, calculate the MAPE (Mean Absolute Percentage Error) of each forecast; and based on the MAPEs; and explain why in your opinion such values of α have yielded the most accurate forecasts for the two stocks.
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(iii) Use your exponential smoothing forecast of part (ii) with 𝜶=0.60 and perform an adjusted exponential smoothing to forecast both prices for period 253. Use successive values of 0.30, 0.45, 0.60, and 0.75 for the trend parameters β for both stocks. Next, calculate the MAPEs of your forecasts and determine the values of β that have provided the most accurate forecasts for both stocks. In your report, describe your results (use a table) and explain why, in your opinion, such values of β have yielded the most accurate forecasts.
Part 2: Long-term Forecasting
(i) For each stock, use a 3-period weighted moving average to forecast its value during periods
1 through 50. Use the weights 0.45 (for the most recent period t-1), Describe how accurate this method of forecasting has been by
PA
Northeastern University ALY 6050 2024 Winter B
comparing the forecasted values for periods 253-262 with their actual “Close” values on those specific days. Please list the actual values and your predictions (Hint: check the actual values on https://finance.yahoo.com).
(ii) Calculate the MAPEs of your forecasts in question (i) above for periods through 4 to 252 and compare them with the values obtained for your forecasts in Part 1. For each stock, describe which method has yielded the most accurate forecast.
(iii) Calculate MAPE for periods 253-262 as well.
Part 3: Regression:
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(i) For each stock, use simple regression(from periods 1 to 252) of stock values versus the time
periods to predict its values for periods 1 through 262. In your report, describe how the accuracy of this prediction(MAPEs) has been compared to the methods used in Parts 1 and 2 of the project.
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(ii) Perform a residual analysis of your simple regression to verify whether regression is appropriate to use for each of the given data. In particular, determine:
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● Whether the residuals are independent
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● Whether the residuals are normally distributed by plotting a normal probability plot of the residuals
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● Whether the residuals are normally distributed by performing a Chi-square test for normality of the residuals.
Part 4: Baseline Model:
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(i) Use the most recent price as the prediction of current price for periods 2 through 252. Calculate the MAPEs.
After completing parts 1-4 and in your report, respond to the following question. Note this question is subjective (although it can be solved analytically), and it does not necessarily have only one correct answer at this stage of the course.
Question: Suppose that you have decided to form a portfolio 𝛱 (Pi) consisting of the above two stock types (denote a share value of NFLX by 𝑋 and that of AMZN by 𝑌). You are, however, undecided as to what percentage of your investment should be allocated to the AMZN shares and what percentage should be allocated to NFLX shares. Let these percentages be denoted by N for NFLX and A for AMZN respectively (Obviously, N + A = 100%). In your opinion, what are good values to select for N and A?
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