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1 Simple exponential smoothing | Forecasting: Principles and Practice (3rd ed)

8.1 Simple exponential smoothing

The simplest of the exponentially smoothing methods is naturally called simple

exponential smoothing (SES)16. This method is suitable for forecasting data with no
clear trend or seasonal pattern. For example, the data in Figure 8.1 do not display any
clear trending behaviour or any seasonality. (There is a decline in the last few years,
which might suggest a trend. We will consider whether a trended method would be
better for this series later in this chapter.) We have already considered the naïve and
the average as possible methods for forecasting such data (Section 5.2).

algeria_economy <- global_economy |>

filter(Country == "Algeria")
algeria_economy |>
autoplot(Exports) +
labs(y = "% of GDP", title = "Exports: Algeria")

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Figure 8.1: Exports of goods and services from Algeria from 1960 to 2017.
Using the naïve method, all forecasts for the future are equal to the last observed
value of the series,

y^T +h|T = yT ,

for h = 1, 2, …. Hence, the naïve method assumes that the most recent observation
is the only important one, and all previous observations provide no information for
the future. This can be thought of as a weighted average where all of the weight is
given to the last observation.

Using the average method, all future forecasts are equal to a simple average of the
observed data,

T
1
y^T +h|T = ∑y ,
T t=1 t

for h = 1, 2, …. Hence, the average method assumes that all observations are of
equal importance, and gives them equal weights when generating forecasts.

We often want something between these two extremes. For example, it may be
sensible to attach larger weights to more recent observations than to observations
from the distant past. This is exactly the concept behind simple exponential
smoothing. Forecasts are calculated using weighted averages, where the weights

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decrease exponentially as observations come from further in the past — the smallest
weights are associated with the oldest observations:

y^T +1|T = αyT + α(1 − α)yT −1 + α(1 − α)2 yT −2 + ⋯ , (8.1)

where 0 ≤ α ≤ 1 is the smoothing parameter. The one-step-ahead forecast for time

T + 1 is a weighted average of all of the observations in the series y1 , … , yT . The
rate at which the weights decrease is controlled by the parameter α.

The table below shows the weights attached to observations for four different values
of α when forecasting using simple exponential smoothing. Note that the sum of the
weights even for a small value of α will be approximately one for any reasonable
sample size.

α = 0.2 α = 0.4 α = 0.6 α = 0.8

yT 0.2000 0.4000 0.6000 0.8000
yT −1 0.1600 0.2400 0.2400 0.1600
yT −2 0.1280 0.1440 0.0960 0.0320
yT −3 0.1024 0.0864 0.0384 0.0064
yT −4 0.0819 0.0518 0.0154 0.0013
yT −5 0.0655 0.0311 0.0061 0.0003

For any α between 0 and 1, the weights attached to the observations decrease
exponentially as we go back in time, hence the name “exponential smoothing”. If α
is small (i.e., close to 0), more weight is given to observations from the more distant
past. If α is large (i.e., close to 1), more weight is given to the more recent
observations. For the extreme case where α = 1, y^T +1|T = yT , and the forecasts are
equal to the naïve forecasts.

We present two equivalent forms of simple exponential smoothing, each of which

leads to the forecast Equation (8.1).

Weighted average form

The forecast at time T+ 1 is equal to a weighted average between the most recent
^T |T −1 :
observation yT and the previous forecast y

y^T +1|T = αyT + (1 − α)^

y T |T −1 ,

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where 0 ≤ α ≤ 1 is the smoothing parameter. Similarly, we can write the fitted

values as

y^t+1|t = αyt + (1 − α)^

y t|t−1 ,

for t = 1, … , T . (Recall that fitted values are simply one-step forecasts of the
training data.)

The process has to start somewhere, so we let the first fitted value at time 1 be
denoted by ℓ0 (which we will have to estimate). Then

y^2|1 = αy1 + (1 − α)ℓ0

y^3|2 = αy2 + (1 − α)y^2|1
y^4|3 = αy3 + (1 − α)^
y 3|2

⋮
y^T |T −1 = αyT −1 + (1 − α)y^T −1|T −2
y^T +1|T = αyT + (1 − α)y^T |T −1 .

Substituting each equation into the following equation, we obtain

y^3|2 = αy2 + (1 − α) [αy1 + (1 − α)ℓ0 ]

= αy2 + α(1 − α)y1 + (1 − α)2 ℓ0
y^4|3 = αy3 + (1 − α)[αy2 + α(1 − α)y1 + (1 − α)2 ℓ0 ]
= αy3 + α(1 − α)y2 + α(1 − α)2 y1 + (1 − α)3 ℓ0
⋮
T −1
y^T +1|T = ∑ α(1 − α)j yT −j + (1 − α)T ℓ0 .
j=0

The last term becomes tiny for large T . So, the weighted average form leads to the
same forecast Equation (8.1).

Component form

An alternative representation is the component form. For simple exponential

smoothing, the only component included is the level, ℓt . (Other methods which are
considered later in this chapter may also include a trend bt and a seasonal component
st .) Component form representations of exponential smoothing methods comprise a

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forecast equation and a smoothing equation for each of the components included in
the method. The component form of simple exponential smoothing is given by:

Forecast equation y^t+h|t = ℓt

Smoothing equation ℓt = αyt + (1 − α)ℓt−1 ,

where ℓt is the level (or the smoothed value) of the series at time t. Setting h =1
gives the fitted values, while setting t = T gives the true forecasts beyond the
training data.

The forecast equation shows that the forecast value at time t + 1 is the estimated
level at time t. The smoothing equation for the level (usually referred to as the level
equation) gives the estimated level of the series at each period t.

^t+1|t and ℓt−1 with y^t|t−1 in the smoothing equation, we will

If we replace ℓt with y
recover the weighted average form of simple exponential smoothing.

The component form of simple exponential smoothing is not particularly useful on

its own, but it will be the easiest form to use when we start adding other components.

Flat forecasts

Simple exponential smoothing has a “flat” forecast function:

y^T +h|T = y^T +1|T = ℓT , h = 2, 3, … .

That is, all forecasts take the same value, equal to the last level component.
Remember that these forecasts will only be suitable if the time series has no trend or
seasonal component.

Optimisation

The application of every exponential smoothing method requires the smoothing

parameters and the initial values to be chosen. In particular, for simple exponential
smoothing, we need to select the values of α and ℓ0 . All forecasts can be computed
from the data once we know those values. For the methods that follow there is
usually more than one smoothing parameter and more than one initial component to
be chosen.

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In some cases, the smoothing parameters may be chosen in a subjective manner —

the forecaster specifies the value of the smoothing parameters based on previous
experience. However, a more reliable and objective way to obtain values for the
unknown parameters is to estimate them from the observed data.

In Section 7.2, we estimated the coefficients of a regression model by minimising the

sum of the squared residuals (usually known as SSE or “sum of squared errors”).
Similarly, the unknown parameters and the initial values for any exponential
smoothing method can be estimated by minimising the SSE. The residuals are
specified as et = yt − y^t|t−1 for t = 1, … , T . Hence, we find the values of the
unknown parameters and the initial values that minimise

T T
SSE = ∑(yt − y^t|t−1 ) = ∑ e2t . 2
(8.2)
t=1 t=1

Unlike the regression case (where we have formulas which return the values of the
regression coefficients that minimise the SSE), this involves a non-linear
minimisation problem, and we need to use an optimisation tool to solve it.

Example: Algerian exports

In this example, simple exponential smoothing is applied to forecast exports of

goods and services from Algeria.

# Estimate parameters
fit <- algeria_economy |>
model(ETS(Exports ~ error("A") + trend("N") + season("N")))

fc <- fit |>

forecast(h = 5)

^
This gives parameter estimates α = 0.84 and ℓ^0 = 39.5, obtained by minimising SSE
over periods t = 1, 2, … , 58, subject to the restriction that 0 ≤ α ≤ 1.

In Table 8.1 we demonstrate the calculation using these parameters. The second last
column shows the estimated level for times t = 0 to t = 58; the last few rows of the
last column show the forecasts for h = 1 to 5-steps ahead.

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Table 8.1: Forecasting goods and services exports from Algeria using simple
exponential smoothing.

Year Time Observation Level Forecast

t yt ℓt y^t|t−1
1959 0 39.54
1960 1 39.04 39.12 39.54
1961 2 46.24 45.10 39.12
1962 3 19.79 23.84 45.10
1963 4 24.68 24.55 23.84
1964 5 25.08 25.00 24.55
1965 6 22.60 22.99 25.00
1966 7 25.99 25.51 22.99
1967 8 23.43 23.77 25.51
⋮ ⋮ ⋮ ⋮
2014 55 30.22 30.80 33.85
2015 56 23.17 24.39 30.80
2016 57 20.86 21.43 24.39
2017 58 22.64 22.44 21.43
h y^T +h|T
2018 1 22.44
2019 2 22.44
2020 3 22.44
2021 4 22.44
2022 5 22.44

The black line in Figure 8.2 shows the data, which has a changing level over time.

fc |>
autoplot(algeria_economy) +
geom_line(aes(y = .fitted), col="#D55E00",
data = augment(fit)) +

labs(y="% of GDP", title="Exports: Algeria") +

guides(colour = "none")

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Figure 8.2: Simple exponential smoothing applied to exports from Algeria (1960–2017). The
orange curve shows the one-step-ahead fitted values.
The forecasts for the period 2018–2022 are plotted in Figure 8.2. Also plotted are
one-step-ahead fitted values alongside the data over the period 1960–2017. The
large value of α in this example is reflected in the large adjustment that takes place
in the estimated level ℓt at each time. A smaller value of α would lead to smaller
changes over time, and so the series of fitted values would be smoother.

The prediction intervals shown here are calculated using the methods described in
Section 8.7. The prediction intervals show that there is considerable uncertainty in
the future exports over the five-year forecast period. So interpreting the point
forecasts without accounting for the large uncertainty can be very misleading.

16. In some books it is called “single exponential smoothing”.↩︎

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