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Forecasting and Model Selection: Anurag Prasad
Forecasting and Model Selection: Anurag Prasad
Outline
Forecasting Methods
Assumptions of Forecasting
ModelBuilding Phase
Theory and/or Historical Data
Forecasting Phase
Model Specification
Model Estimation
Data
Degree of Accuracy Required Cost of Producing Forecasts Forecast Horizon Degree of Complexity Required Available Data
Autoregressive Moving Average (ARMA) Exponential Smoothing Extrapolation Linear Prediction Trend Estimation Growth Curve Box-Jenkins Approach
Causal Methods
Belief that some other time series can be useful Assumption that it is possible to identify the underlying factors
1
Judgemental Methods
Incorporate intuitive judgements, opinions and probability estimates
1 2 3 4 5 6
Composite Forecasts Surveys Delphi Method Scenario Building Technology Forecasting Forecast by Analogy
Forecast Error
For t = 1, . . . , N, y (t) : Actual value at period t, y(t) : Forecast value at period t; e(t) : Forecast error at period t;
y(t)
^ ) y(t i y(t ) i t t i
10
Plot of y (t) versus y (t) Keep the same scale for both the axes. Departure of points from the 450 line through origin indicates imperfect forecasts.
11
y(t)
y(t)
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Plot of e(t) versus t Reveals patterns of variability which the model has failed to explain. For a good model, the forecast errors should vary in a horizontal band around zero.
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e(t)
0
e(t)
0
e(t)
0
e(t)
0
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Provide a single, easily interpreted measure of models reliability Compare the accuracy of two different models Search for an optimal model Monitor a models performance
2 3 4
15
N t=1
|e(t)| N
N t=1
e(t)2 N
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r=
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worse than "no change" model as good as "no change" model better than "no change" model
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Further Readings
Quantitative Forecasting Methods, N.R. Farnum and L.W. Stanton, 1989, PWS-KENT Publishing Co. Statistical Methods for Forecasting, B. Abraham and J. Ledolter, 1983, John Wiley & Sons Introduction to Time Series and Forecasting, P.J. Brockwell and R.A. Davis, 2002 (Second Edition) , Springer-Verlag Time Series Analysis and Forecasting, R. Yaffee, 2000, Academic Press
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Thank You
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