Economics

Itishopedthatthereaderfindsthematerialinthisbookhelpfultounderstand
why
suchnewmethodscanbeusefulforforecasting.
Althoughthisbookamountstoanintroductiontothefieldoftimeseriesanalysis
and
forecasting,itisnecessarythatthereaderhasknowledgeofintroductory
econometrics.
Specifically,regressionanalysis,matrixalgebraandvariousconceptsin
estimation
shouldbeincludedinthatknowledge.Thisbookshouldthenbeusefultoadvanced
undergraduatestudentsandgraduatestudentsinbusinessandeconomics,butalsoto
practitionersandappliedeconomistswhowishtoobtainafirst,butnottoo
technical,
impressionoftimeseriesforecasting.Infact,mostofthematerialhasalready
been
usedinTimeSeriesAnalysiscoursesforthirdyearundergraduatestudentsatthe
EconometricInstituteinRotterdameversince1996.
Thefirsteditionofthisbook(Franses(1998))containedmaterialthathasnow
beendeleted.Periodicmodelsforseasonaldataarenotincludedanymoreandalso
an
extensivediscussionofcommonfeatureshasbeendeleted.Ontheotherhand,more
detailsonARCHmodelsandonnonlinearmodelshavebeenincluded,wherewe
drawfromthematerialina2000CambridgeUniversityPresstextbookbythefirst
twoauthors.Moreimportantly,thisfullyrevisedsecondeditioncontains
exercises.
Answerstoselectedexerciseswillbemadeavailableonaspecialwebsite.These
exercisesmatchwiththosepresentedatpastexamstoourstudents.
ThisbookwaswrittenduringouraffiliationwiththeEconometricInstituteat
theErasmusUniversityRotterdam.ThisInstituteisaverystimulatingteachingand
researchenvironment.Wewishtoexpressourgratitudetoour(then)colleagues
Teun
Kloek,ChristiaanHeij,HermanvanDijk,DennisFok,RichardPaap,AndreLucas,
MariusOomsandanonymousreviewersfortheirkindwillingnesstocommenton
someorallchapters
Theeconometricanalysisofeconomicandbusinesstimeseriesisamajorfieldof
researchandapplication.Thelastfewdecadeshavewitnessedanincreasing
interest
inboththeoreticalandempiricaldevelopmentsinconstructingtimeseriesmodels
andintheirimportantapplicationinforecasting.Thisbookaimsatreviewing
several
importantdevelopmentswithinthecontextofforecastingbusinessandeconomictime
series.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
Page1

Economics
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.
Itishopedthatthereaderfindsthematerialinthisbookhelpfultounderstand
why
suchnewmethodscanbeusefulforforecasting.
Althoughthisbookamountstoanintroductiontothefieldoftimeseriesanalysis
and
forecasting,itisnecessarythatthereaderhasknowledgeofintroductory
econometrics.
Specifically,regressionanalysis,matrixalgebraandvariousconceptsin
estimation
shouldbeincludedinthatknowledge.Thisbookshouldthenbeusefultoadvanced
undergraduatestudentsandgraduatestudentsinbusinessandeconomics,butalsoto
practitionersandappliedeconomistswhowishtoobtainafirst,butnottoo
technical,
Page2

Economics
impressionoftimeseriesforecasting.Infact,mostofthematerialhasalready
been
usedinTimeSeriesAnalysiscoursesforthirdyearundergraduatestudentsatthe
EconometricInstituteinRotterdameversince1996.
Thefirsteditionofthisbook(Franses(1998))containedmaterialthathasnow
beendeleted.Periodicmodelsforseasonaldataarenotincludedanymoreandalso
an
extensivediscussionofcommonfeatureshasbeendeleted.Ontheotherhand,more
detailsonARCHmodelsandonnonlinearmodelshavebeenincluded,wherewe
drawfromthematerialina2000CambridgeUniversityPresstextbookbythefirst
twoauthors.Moreimportantly,thisfullyrevisedsecondeditioncontains
exercises.
Answerstoselectedexerciseswillbemadeavailableonaspecialwebsite.These
exercisesmatchwiththosepresentedatpastexamstoourstudents.
ThisbookwaswrittenduringouraffiliationwiththeEconometricInstituteat
theErasmusUniversityRotterdam.ThisInstituteisaverystimulatingteachingand
researchenvironment.Wewishtoexpressourgratitudetoour(then)colleagues
Teun
Kloek,ChristiaanHeij,HermanvanDijk,DennisFok,RichardPaap,AndreLucas,
MariusOomsandanonymousreviewersfortheirkindwillingnesstocommenton
someorallchapters
Theeconometricanalysisofeconomicandbusinesstimeseriesisamajorfieldof
researchandapplication.Thelastfewdecadeshavewitnessedanincreasing
interest
inboththeoreticalandempiricaldevelopmentsinconstructingtimeseriesmodels
andintheirimportantapplicationinforecasting.Thisbookaimsatreviewing
several
importantdevelopmentswithinthecontextofforecastingbusinessandeconomictime
series.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
Page3

Economics
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
Page4

Economics
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletoget
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingan
Itishopedthatthereaderfindsthematerialinthisbookhelpfultounderstand
why
suchnewmethodscanbeusefulforforecasting.
Althoughthisbookamountstoanintroductiontothefieldoftimeseriesanalysis
and
forecasting,itisnecessarythatthereaderhasknowledgeofintroductory
econometrics.
Specifically,regressionanalysis,matrixalgebraandvariousconceptsin
estimation
shouldbeincludedinthatknowledge.Thisbookshouldthenbeusefultoadvanced
undergraduatestudentsandgraduatestudentsinbusinessandeconomics,butalsoto
Page5

Economics
practitionersandappliedeconomistswhowishtoobtainafirst,butnottoo
technical,
impressionoftimeseriesforecasting.Infact,mostofthematerialhasalready
been
usedinTimeSeriesAnalysiscoursesforthirdyearundergraduatestudentsatthe
EconometricInstituteinRotterdameversince1996.
Thefirsteditionofthisbook(Franses(1998))containedmaterialthathasnow
beendeleted.Periodicmodelsforseasonaldataarenotincludedanymoreandalso
an
extensivediscussionofcommonfeatureshasbeendeleted.Ontheotherhand,more
detailsonARCHmodelsandonnonlinearmodelshavebeenincluded,wherewe
drawfromthematerialina2000CambridgeUniversityPresstextbookbythefirst
twoauthors.Moreimportantly,thisfullyrevisedsecondeditioncontains
exercises.
Answerstoselectedexerciseswillbemadeavailableonaspecialwebsite.These
exercisesmatchwiththosepresentedatpastexamstoourstudents.
ThisbookwaswrittenduringouraffiliationwiththeEconometricInstituteat
theErasmusUniversityRotterdam.ThisInstituteisaverystimulatingteachingand
researchenvironment.Wewishtoexpressourgratitudetoour(then)colleagues
Teun
Kloek,ChristiaanHeij,HermanvanDijk,DennisFok,RichardPaap,AndreLucas,
MariusOomsandanonymousreviewersfortheirkindwillingnesstocommenton
someorallchapters
Theeconometricanalysisofeconomicandbusinesstimeseriesisamajorfieldof
researchandapplication.Thelastfewdecadeshavewitnessedanincreasing
interest
inboththeoreticalandempiricaldevelopmentsinconstructingtimeseriesmodels
andintheirimportantapplicationinforecasting.Thisbookaimsatreviewing
several
importantdevelopmentswithinthecontextofforecastingbusinessandeconomictime
series.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
Page6

Economics
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.
Itishopedthatthereaderfindsthematerialinthisbookhelpfultounderstand
why
suchnewmethodscanbeusefulforforecasting.
Althoughthisbookamountstoanintroductiontothefieldoftimeseriesanalysis
and
forecasting,itisnecessarythatthereaderhasknowledgeofintroductory
econometrics.
Specifically,regressionanalysis,matrixalgebraandvariousconceptsin
estimation
shouldbeincludedinthatknowledge.Thisbookshouldthenbeusefultoadvanced
undergraduatestudentsandgraduatestudentsinbusinessandeconomics,butalsoto
practitionersandappliedeconomistswhowishtoobtainafirst,butnottoo
technical,
impressionoftimeseriesforecasting.Infact,mostofthematerialhasalready
been
usedinTimeSeriesAnalysiscoursesforthirdyearundergraduatestudentsatthe
EconometricInstituteinRotterdameversince1996.
Thefirsteditionofthisbook(Franses(1998))containedmaterialthathasnow
beendeleted.Periodicmodelsforseasonaldataarenotincludedanymoreandalso
an
extensivediscussionofcommonfeatureshasbeendeleted.Ontheotherhand,more
detailsonARCHmodelsandonnonlinearmodelshavebeenincluded,wherewe
drawfromthematerialina2000CambridgeUniversityPresstextbookbythefirst
twoauthors.Moreimportantly,thisfullyrevisedsecondeditioncontains
Page7

Economics
exercises.
Answerstoselectedexerciseswillbemadeavailableonaspecialwebsite.These
exercisesmatchwiththosepresentedatpastexamstoourstudents.
ThisbookwaswrittenduringouraffiliationwiththeEconometricInstituteat
theErasmusUniversityRotterdam.ThisInstituteisaverystimulatingteachingand
researchenvironment.Wewishtoexpressourgratitudetoour(then)colleagues
Teun
Kloek,ChristiaanHeij,HermanvanDijk,DennisFok,RichardPaap,AndreLucas,
MariusOomsandanonymousreviewersfortheirkindwillingnesstocommenton
someorallchapters
Theeconometricanalysisofeconomicandbusinesstimeseriesisamajorfieldof
researchandapplication.Thelastfewdecadeshavewitnessedanincreasing
interest
inboththeoreticalandempiricaldevelopmentsinconstructingtimeseriesmodels
andintheirimportantapplicationinforecasting.Thisbookaimsatreviewing
several
importantdevelopmentswithinthecontextofforecastingbusinessandeconomictime
series.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
Page8

Economics
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletoget
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
Page9

Economics
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingan

Itishopedthatthereaderfindsthematerialinthisbookhelpfultounderstand
why
suchnewmethodscanbeusefulforforecasting.
Althoughthisbookamountstoanintroductiontothefieldoftimeseriesanalysis
and
forecasting,itisnecessarythatthereaderhasknowledgeofintroductory
econometrics.
Specifically,regressionanalysis,matrixalgebraandvariousconceptsin
estimation
shouldbeincludedinthatknowledge.Thisbookshouldthenbeusefultoadvanced
undergraduatestudentsandgraduatestudentsinbusinessandeconomics,butalsoto
practitionersandappliedeconomistswhowishtoobtainafirst,butnottoo
technical,
impressionoftimeseriesforecasting.Infact,mostofthematerialhasalready
been
usedinTimeSeriesAnalysiscoursesforthirdyearundergraduatestudentsatthe
EconometricInstituteinRotterdameversince1996.
Thefirsteditionofthisbook(Franses(1998))containedmaterialthathasnow
beendeleted.Periodicmodelsforseasonaldataarenotincludedanymoreandalso
an
Page10

Economics
extensivediscussionofcommonfeatureshasbeendeleted.Ontheotherhand,more
detailsonARCHmodelsandonnonlinearmodelshavebeenincluded,wherewe
drawfromthematerialina2000CambridgeUniversityPresstextbookbythefirst
twoauthors.Moreimportantly,thisfullyrevisedsecondeditioncontains
exercises.
Answerstoselectedexerciseswillbemadeavailableonaspecialwebsite.These
exercisesmatchwiththosepresentedatpastexamstoourstudents.
ThisbookwaswrittenduringouraffiliationwiththeEconometricInstituteat
theErasmusUniversityRotterdam.ThisInstituteisaverystimulatingteachingand
researchenvironment.Wewishtoexpressourgratitudetoour(then)colleagues
Teun
Kloek,ChristiaanHeij,HermanvanDijk,DennisFok,RichardPaap,AndreLucas,
MariusOomsandanonymousreviewersfortheirkindwillingnesstocommenton
someorallchapters
Theeconometricanalysisofeconomicandbusinesstimeseriesisamajorfieldof
researchandapplication.Thelastfewdecadeshavewitnessedanincreasing
interest
inboththeoreticalandempiricaldevelopmentsinconstructingtimeseriesmodels
andintheirimportantapplicationinforecasting.Thisbookaimsatreviewing
several
importantdevelopmentswithinthecontextofforecastingbusinessandeconomictime
series.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
Page11

Economics
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Page12

Economics
Thesecondpurposewiththisbookisthatthereaderwillbeabletoget
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.

Itishopedthatthereaderfindsthematerialinthisbookhelpfultounderstand
why
suchnewmethodscanbeusefulforforecasting.
Althoughthisbookamountstoanintroductiontothefieldoftimeseriesanalysis
and
forecasting,itisnecessarythatthereaderhasknowledgeofintroductory
econometrics.
Specifically,regressionanalysis,matrixalgebraandvariousconceptsin
estimation
shouldbeincludedinthatknowledge.Thisbookshouldthenbeusefultoadvanced
undergraduatestudentsandgraduatestudentsinbusinessandeconomics,butalsoto
practitionersandappliedeconomistswhowishtoobtainafirst,butnottoo
technical,
impressionoftimeseriesforecasting.Infact,mostofthematerialhasalready
been
usedinTimeSeriesAnalysiscoursesforthirdyearundergraduatestudentsatthe
EconometricInstituteinRotterdameversince1996.
Thefirsteditionofthisbook(Franses(1998))containedmaterialthathasnow
beendeleted.Periodicmodelsforseasonaldataarenotincludedanymoreandalso
an
extensivediscussionofcommonfeatureshasbeendeleted.Ontheotherhand,more
detailsonARCHmodelsandonnonlinearmodelshavebeenincluded,wherewe
drawfromthematerialina2000CambridgeUniversityPresstextbookbythefirst
twoauthors.Moreimportantly,thisfullyrevisedsecondeditioncontains
exercises.
Answerstoselectedexerciseswillbemadeavailableonaspecialwebsite.These
exercisesmatchwiththosepresentedatpastexamstoourstudents.
ThisbookwaswrittenduringouraffiliationwiththeEconometricInstituteat
theErasmusUniversityRotterdam.ThisInstituteisaverystimulatingteachingand
researchenvironment.Wewishtoexpressourgratitudetoour(then)colleagues
Teun
Kloek,ChristiaanHeij,HermanvanDijk,DennisFok,RichardPaap,AndreLucas,
MariusOomsandanonymousreviewersfortheirkindwillingnesstocommenton
someorallchapters
Theeconometricanalysisofeconomicandbusinesstimeseriesisamajorfieldof
Page13

Economics
researchandapplication.Thelastfewdecadeshavewitnessedanincreasing
interest
inboththeoreticalandempiricaldevelopmentsinconstructingtimeseriesmodels
andintheirimportantapplicationinforecasting.Thisbookaimsatreviewing
several
importantdevelopmentswithinthecontextofforecastingbusinessandeconomictime
series.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
Page14

Economics
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletoget
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.
Itishopedthatthereaderfindsthematerialinthisbookhelpfultounderstand
why
suchnewmethodscanbeusefulforforecasting.
Althoughthisbookamountstoanintroductiontothefieldoftimeseriesanalysis
and
forecasting,itisnecessarythatthereaderhasknowledgeofintroductory
Page15

Economics
econometrics.
Specifically,regressionanalysis,matrixalgebraandvariousconceptsin
estimation
shouldbeincludedinthatknowledge.Thisbookshouldthenbeusefultoadvanced
undergraduatestudentsandgraduatestudentsinbusinessandeconomics,butalsoto
practitionersandappliedeconomistswhowishtoobtainafirst,butnottoo
technical,
impressionoftimeseriesforecasting.Infact,mostofthematerialhasalready
been
usedinTimeSeriesAnalysiscoursesforthirdyearundergraduatestudentsatthe
EconometricInstituteinRotterdameversince1996.
Thefirsteditionofthisbook(Franses(1998))containedmaterialthathasnow
beendeleted.Periodicmodelsforseasonaldataarenotincludedanymoreandalso
an
extensivediscussionofcommonfeatureshasbeendeleted.Ontheotherhand,more
detailsonARCHmodelsandonnonlinearmodelshavebeenincluded,wherewe
drawfromthematerialina2000CambridgeUniversityPresstextbookbythefirst
twoauthors.Moreimportantly,thisfullyrevisedsecondeditioncontains
exercises.
Answerstoselectedexerciseswillbemadeavailableonaspecialwebsite.These
exercisesmatchwiththosepresentedatpastexamstoourstudents.
ThisbookwaswrittenduringouraffiliationwiththeEconometricInstituteat
theErasmusUniversityRotterdam.ThisInstituteisaverystimulatingteachingand
researchenvironment.Wewishtoexpressourgratitudetoour(then)colleagues
Teun
Kloek,ChristiaanHeij,HermanvanDijk,DennisFok,RichardPaap,AndreLucas,
MariusOomsandanonymousreviewersfortheirkindwillingnesstocommenton
someorallchapters
Theeconometricanalysisofeconomicandbusinesstimeseriesisamajorfieldof
researchandapplication.Thelastfewdecadeshavewitnessedanincreasing
interest
inboththeoreticalandempiricaldevelopmentsinconstructingtimeseriesmodels
andintheirimportantapplicationinforecasting.Thisbookaimsatreviewing
several
importantdevelopmentswithinthecontextofforecastingbusinessandeconomictime
series.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
Page16

Economics
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.
Itishopedthatthereaderfindsthematerialinthisbookhelpfultounderstand
why
suchnewmethodscanbeusefulforforecasting.
Althoughthisbookamountstoanintroductiontothefieldoftimeseriesanalysis
and
forecasting,itisnecessarythatthereaderhasknowledgeofintroductory
econometrics.
Specifically,regressionanalysis,matrixalgebraandvariousconceptsin
estimation
shouldbeincludedinthatknowledge.Thisbookshouldthenbeusefultoadvanced
undergraduatestudentsandgraduatestudentsinbusinessandeconomics,butalsoto
practitionersandappliedeconomistswhowishtoobtainafirst,butnottoo
technical,
impressionoftimeseriesforecasting.Infact,mostofthematerialhasalready
been
usedinTimeSeriesAnalysiscoursesforthirdyearundergraduatestudentsatthe
EconometricInstituteinRotterdameversince1996.
Thefirsteditionofthisbook(Franses(1998))containedmaterialthathasnow
beendeleted.Periodicmodelsforseasonaldataarenotincludedanymoreandalso
Page17

Economics
an
extensivediscussionofcommonfeatureshasbeendeleted.Ontheotherhand,more
detailsonARCHmodelsandonnonlinearmodelshavebeenincluded,wherewe
drawfromthematerialina2000CambridgeUniversityPresstextbookbythefirst
twoauthors.Moreimportantly,thisfullyrevisedsecondeditioncontains
exercises.
Answerstoselectedexerciseswillbemadeavailableonaspecialwebsite.These
exercisesmatchwiththosepresentedatpastexamstoourstudents.
ThisbookwaswrittenduringouraffiliationwiththeEconometricInstituteat
theErasmusUniversityRotterdam.ThisInstituteisaverystimulatingteachingand
researchenvironment.Wewishtoexpressourgratitudetoour(then)colleagues
Teun
Kloek,ChristiaanHeij,HermanvanDijk,DennisFok,RichardPaap,AndreLucas,
MariusOomsandanonymousreviewersfortheirkindwillingnesstocommenton
someorallchapters
Theeconometricanalysisofeconomicandbusinesstimeseriesisamajorfieldof
researchandapplication.Thelastfewdecadeshavewitnessedanincreasing
interest
inboththeoreticalandempiricaldevelopmentsinconstructingtimeseriesmodels
andintheirimportantapplicationinforecasting.Thisbookaimsatreviewing
several
importantdevelopmentswithinthecontextofforecastingbusinessandeconomictime
series.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
Page18

Economics
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
Page19

Economics
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletoget
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingan
Itishopedthatthereaderfindsthematerialinthisbookhelpfultounderstand
why
suchnewmethodscanbeusefulforforecasting.
Althoughthisbookamountstoanintroductiontothefieldoftimeseriesanalysis
and
forecasting,itisnecessarythatthereaderhasknowledgeofintroductory
econometrics.
Specifically,regressionanalysis,matrixalgebraandvariousconceptsin
estimation
shouldbeincludedinthatknowledge.Thisbookshouldthenbeusefultoadvanced
undergraduatestudentsandgraduatestudentsinbusinessandeconomics,butalsoto
practitionersandappliedeconomistswhowishtoobtainafirst,butnottoo
technical,
impressionoftimeseriesforecasting.Infact,mostofthematerialhasalready
been
usedinTimeSeriesAnalysiscoursesforthirdyearundergraduatestudentsatthe
EconometricInstituteinRotterdameversince1996.
Page20

Economics
Thefirsteditionofthisbook(Franses(1998))containedmaterialthathasnow
beendeleted.Periodicmodelsforseasonaldataarenotincludedanymoreandalso
an
extensivediscussionofcommonfeatureshasbeendeleted.Ontheotherhand,more
detailsonARCHmodelsandonnonlinearmodelshavebeenincluded,wherewe
drawfromthematerialina2000CambridgeUniversityPresstextbookbythefirst
twoauthors.Moreimportantly,thisfullyrevisedsecondeditioncontains
exercises.
Answerstoselectedexerciseswillbemadeavailableonaspecialwebsite.These
exercisesmatchwiththosepresentedatpastexamstoourstudents.
ThisbookwaswrittenduringouraffiliationwiththeEconometricInstituteat
theErasmusUniversityRotterdam.ThisInstituteisaverystimulatingteachingand
researchenvironment.Wewishtoexpressourgratitudetoour(then)colleagues
Teun
Kloek,ChristiaanHeij,HermanvanDijk,DennisFok,RichardPaap,AndreLucas,
MariusOomsandanonymousreviewersfortheirkindwillingnesstocommenton
someorallchapters
Theeconometricanalysisofeconomicandbusinesstimeseriesisamajorfieldof
researchandapplication.Thelastfewdecadeshavewitnessedanincreasing
interest
inboththeoreticalandempiricaldevelopmentsinconstructingtimeseriesmodels
andintheirimportantapplicationinforecasting.Thisbookaimsatreviewing
several
importantdevelopmentswithinthecontextofforecastingbusinessandeconomictime
series.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
Page21

Economics
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.
Itishopedthatthereaderfindsthematerialinthisbookhelpfultounderstand
why
suchnewmethodscanbeusefulforforecasting.
Althoughthisbookamountstoanintroductiontothefieldoftimeseriesanalysis
and
forecasting,itisnecessarythatthereaderhasknowledgeofintroductory
econometrics.
Specifically,regressionanalysis,matrixalgebraandvariousconceptsin
estimation
shouldbeincludedinthatknowledge.Thisbookshouldthenbeusefultoadvanced
undergraduatestudentsandgraduatestudentsinbusinessandeconomics,butalsoto
practitionersandappliedeconomistswhowishtoobtainafirst,butnottoo
technical,
impressionoftimeseriesforecasting.Infact,mostofthematerialhasalready
been
usedinTimeSeriesAnalysiscoursesforthirdyearundergraduatestudentsatthe
EconometricInstituteinRotterdameversince1996.
Thefirsteditionofthisbook(Franses(1998))containedmaterialthathasnow
beendeleted.Periodicmodelsforseasonaldataarenotincludedanymoreandalso
an
extensivediscussionofcommonfeatureshasbeendeleted.Ontheotherhand,more
detailsonARCHmodelsandonnonlinearmodelshavebeenincluded,wherewe
drawfromthematerialina2000CambridgeUniversityPresstextbookbythefirst
twoauthors.Moreimportantly,thisfullyrevisedsecondeditioncontains
exercises.
Answerstoselectedexerciseswillbemadeavailableonaspecialwebsite.These
exercisesmatchwiththosepresentedatpastexamstoourstudents.
ThisbookwaswrittenduringouraffiliationwiththeEconometricInstituteat
theErasmusUniversityRotterdam.ThisInstituteisaverystimulatingteachingand
researchenvironment.Wewishtoexpressourgratitudetoour(then)colleagues
Page22

Economics
Teun
Kloek,ChristiaanHeij,HermanvanDijk,DennisFok,RichardPaap,AndreLucas,
MariusOomsandanonymousreviewersfortheirkindwillingnesstocommenton
someorallchapters
Theeconometricanalysisofeconomicandbusinesstimeseriesisamajorfieldof
researchandapplication.Thelastfewdecadeshavewitnessedanincreasing
interest
inboththeoreticalandempiricaldevelopmentsinconstructingtimeseriesmodels
andintheirimportantapplicationinforecasting.Thisbookaimsatreviewing
several
importantdevelopmentswithinthecontextofforecastingbusinessandeconomictime
series.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
Page23

Economics
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletoget
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.
Page24

Economics
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingan

Itishopedthatthereaderfindsthematerialinthisbookhelpfultounderstand
why
suchnewmethodscanbeusefulforforecasting.
Althoughthisbookamountstoanintroductiontothefieldoftimeseriesanalysis
and
forecasting,itisnecessarythatthereaderhasknowledgeofintroductory
econometrics.
Specifically,regressionanalysis,matrixalgebraandvariousconceptsin
estimation
shouldbeincludedinthatknowledge.Thisbookshouldthenbeusefultoadvanced
undergraduatestudentsandgraduatestudentsinbusinessandeconomics,butalsoto
practitionersandappliedeconomistswhowishtoobtainafirst,butnottoo
technical,
impressionoftimeseriesforecasting.Infact,mostofthematerialhasalready
been
usedinTimeSeriesAnalysiscoursesforthirdyearundergraduatestudentsatthe
EconometricInstituteinRotterdameversince1996.
Thefirsteditionofthisbook(Franses(1998))containedmaterialthathasnow
beendeleted.Periodicmodelsforseasonaldataarenotincludedanymoreandalso
an
extensivediscussionofcommonfeatureshasbeendeleted.Ontheotherhand,more
detailsonARCHmodelsandonnonlinearmodelshavebeenincluded,wherewe
drawfromthematerialina2000CambridgeUniversityPresstextbookbythefirst
twoauthors.Moreimportantly,thisfullyrevisedsecondeditioncontains
exercises.
Answerstoselectedexerciseswillbemadeavailableonaspecialwebsite.These
Page25

Economics
exercisesmatchwiththosepresentedatpastexamstoourstudents.
ThisbookwaswrittenduringouraffiliationwiththeEconometricInstituteat
theErasmusUniversityRotterdam.ThisInstituteisaverystimulatingteachingand
researchenvironment.Wewishtoexpressourgratitudetoour(then)colleagues
Teun
Kloek,ChristiaanHeij,HermanvanDijk,DennisFok,RichardPaap,AndreLucas,
MariusOomsandanonymousreviewersfortheirkindwillingnesstocommenton
someorallchapters
Theeconometricanalysisofeconomicandbusinesstimeseriesisamajorfieldof
researchandapplication.Thelastfewdecadeshavewitnessedanincreasing
interest
inboththeoreticalandempiricaldevelopmentsinconstructingtimeseriesmodels
andintheirimportantapplicationinforecasting.Thisbookaimsatreviewing
several
importantdevelopmentswithinthecontextofforecastingbusinessandeconomictime
series.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
Page26

Economics
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletoget
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
Page27

Economics
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.

Itishopedthatthereaderfindsthematerialinthisbookhelpfultounderstand
why
suchnewmethodscanbeusefulforforecasting.
Althoughthisbookamountstoanintroductiontothefieldoftimeseriesanalysis
and
forecasting,itisnecessarythatthereaderhasknowledgeofintroductory
econometrics.
Specifically,regressionanalysis,matrixalgebraandvariousconceptsin
estimation
shouldbeincludedinthatknowledge.Thisbookshouldthenbeusefultoadvanced
undergraduatestudentsandgraduatestudentsinbusinessandeconomics,butalsoto
practitionersandappliedeconomistswhowishtoobtainafirst,butnottoo
technical,
impressionoftimeseriesforecasting.Infact,mostofthematerialhasalready
been
usedinTimeSeriesAnalysiscoursesforthirdyearundergraduatestudentsatthe
EconometricInstituteinRotterdameversince1996.
Thefirsteditionofthisbook(Franses(1998))containedmaterialthathasnow
beendeleted.Periodicmodelsforseasonaldataarenotincludedanymoreandalso
an
extensivediscussionofcommonfeatureshasbeendeleted.Ontheotherhand,more
detailsonARCHmodelsandonnonlinearmodelshavebeenincluded,wherewe
drawfromthematerialina2000CambridgeUniversityPresstextbookbythefirst
twoauthors.Moreimportantly,thisfullyrevisedsecondeditioncontains
exercises.
Answerstoselectedexerciseswillbemadeavailableonaspecialwebsite.These
exercisesmatchwiththosepresentedatpastexamstoourstudents.
ThisbookwaswrittenduringouraffiliationwiththeEconometricInstituteat
theErasmusUniversityRotterdam.ThisInstituteisaverystimulatingteachingand
researchenvironment.Wewishtoexpressourgratitudetoour(then)colleagues
Teun
Kloek,ChristiaanHeij,HermanvanDijk,DennisFok,RichardPaap,AndreLucas,
MariusOomsandanonymousreviewersfortheirkindwillingnesstocommenton
someorallchapters
Theeconometricanalysisofeconomicandbusinesstimeseriesisamajorfieldof
researchandapplication.Thelastfewdecadeshavewitnessedanincreasing
interest
inboththeoreticalandempiricaldevelopmentsinconstructingtimeseriesmodels
andintheirimportantapplicationinforecasting.Thisbookaimsatreviewing
several
importantdevelopmentswithinthecontextofforecastingbusinessandeconomictime
Page28

Economics
series.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
Page29

Economics
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletoget
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.
Itishopedthatthereaderfindsthematerialinthisbookhelpfultounderstand
why
suchnewmethodscanbeusefulforforecasting.
Althoughthisbookamountstoanintroductiontothefieldoftimeseriesanalysis
and
forecasting,itisnecessarythatthereaderhasknowledgeofintroductory
econometrics.
Specifically,regressionanalysis,matrixalgebraandvariousconceptsin
estimation
shouldbeincludedinthatknowledge.Thisbookshouldthenbeusefultoadvanced
undergraduatestudentsandgraduatestudentsinbusinessandeconomics,butalsoto
practitionersandappliedeconomistswhowishtoobtainafirst,butnottoo
Page30

Economics
technical,
impressionoftimeseriesforecasting.Infact,mostofthematerialhasalready
been
usedinTimeSeriesAnalysiscoursesforthirdyearundergraduatestudentsatthe
EconometricInstituteinRotterdameversince1996.
Thefirsteditionofthisbook(Franses(1998))containedmaterialthathasnow
beendeleted.Periodicmodelsforseasonaldataarenotincludedanymoreandalso
an
extensivediscussionofcommonfeatureshasbeendeleted.Ontheotherhand,more
detailsonARCHmodelsandonnonlinearmodelshavebeenincluded,wherewe
drawfromthematerialina2000CambridgeUniversityPresstextbookbythefirst
twoauthors.Moreimportantly,thisfullyrevisedsecondeditioncontains
exercises.
Answerstoselectedexerciseswillbemadeavailableonaspecialwebsite.These
exercisesmatchwiththosepresentedatpastexamstoourstudents.
ThisbookwaswrittenduringouraffiliationwiththeEconometricInstituteat
theErasmusUniversityRotterdam.ThisInstituteisaverystimulatingteachingand
researchenvironment.Wewishtoexpressourgratitudetoour(then)colleagues
Teun
Kloek,ChristiaanHeij,HermanvanDijk,DennisFok,RichardPaap,AndreLucas,
MariusOomsandanonymousreviewersfortheirkindwillingnesstocommenton
someorallchapters
Theeconometricanalysisofeconomicandbusinesstimeseriesisamajorfieldof
researchandapplication.Thelastfewdecadeshavewitnessedanincreasing
interest
inboththeoreticalandempiricaldevelopmentsinconstructingtimeseriesmodels
andintheirimportantapplicationinforecasting.Thisbookaimsatreviewing
several
importantdevelopmentswithinthecontextofforecastingbusinessandeconomictime
series.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
Page31

Economics
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.
Itishopedthatthereaderfindsthematerialinthisbookhelpfultounderstand
why
suchnewmethodscanbeusefulforforecasting.
Althoughthisbookamountstoanintroductiontothefieldoftimeseriesanalysis
and
forecasting,itisnecessarythatthereaderhasknowledgeofintroductory
econometrics.
Specifically,regressionanalysis,matrixalgebraandvariousconceptsin
estimation
shouldbeincludedinthatknowledge.Thisbookshouldthenbeusefultoadvanced
undergraduatestudentsandgraduatestudentsinbusinessandeconomics,butalsoto
practitionersandappliedeconomistswhowishtoobtainafirst,butnottoo
technical,
impressionoftimeseriesforecasting.Infact,mostofthematerialhasalready
been
usedinTimeSeriesAnalysiscoursesforthirdyearundergraduatestudentsatthe
EconometricInstituteinRotterdameversince1996.
Thefirsteditionofthisbook(Franses(1998))containedmaterialthathasnow
beendeleted.Periodicmodelsforseasonaldataarenotincludedanymoreandalso
an
extensivediscussionofcommonfeatureshasbeendeleted.Ontheotherhand,more
detailsonARCHmodelsandonnonlinearmodelshavebeenincluded,wherewe
drawfromthematerialina2000CambridgeUniversityPresstextbookbythefirst
twoauthors.Moreimportantly,thisfullyrevisedsecondeditioncontains
exercises.
Page32

Economics
Answerstoselectedexerciseswillbemadeavailableonaspecialwebsite.These
exercisesmatchwiththosepresentedatpastexamstoourstudents.
ThisbookwaswrittenduringouraffiliationwiththeEconometricInstituteat
theErasmusUniversityRotterdam.ThisInstituteisaverystimulatingteachingand
researchenvironment.Wewishtoexpressourgratitudetoour(then)colleagues
Teun
Kloek,ChristiaanHeij,HermanvanDijk,DennisFok,RichardPaap,AndreLucas,
MariusOomsandanonymousreviewersfortheirkindwillingnesstocommenton
someorallchapters
Theeconometricanalysisofeconomicandbusinesstimeseriesisamajorfieldof
researchandapplication.Thelastfewdecadeshavewitnessedanincreasing
interest
inboththeoreticalandempiricaldevelopmentsinconstructingtimeseriesmodels
andintheirimportantapplicationinforecasting.Thisbookaimsatreviewing
several
importantdevelopmentswithinthecontextofforecastingbusinessandeconomictime
series.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
Page33

Economics
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletoget
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
Page34

Economics
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingan
Itishopedthatthereaderfindsthematerialinthisbookhelpfultounderstand
why
suchnewmethodscanbeusefulforforecasting.
Althoughthisbookamountstoanintroductiontothefieldoftimeseriesanalysis
and
forecasting,itisnecessarythatthereaderhasknowledgeofintroductory
econometrics.
Specifically,regressionanalysis,matrixalgebraandvariousconceptsin
estimation
shouldbeincludedinthatknowledge.Thisbookshouldthenbeusefultoadvanced
undergraduatestudentsandgraduatestudentsinbusinessandeconomics,butalsoto
practitionersandappliedeconomistswhowishtoobtainafirst,butnottoo
technical,
impressionoftimeseriesforecasting.Infact,mostofthematerialhasalready
been
usedinTimeSeriesAnalysiscoursesforthirdyearundergraduatestudentsatthe
EconometricInstituteinRotterdameversince1996.
Thefirsteditionofthisbook(Franses(1998))containedmaterialthathasnow
beendeleted.Periodicmodelsforseasonaldataarenotincludedanymoreandalso
an
extensivediscussionofcommonfeatureshasbeendeleted.Ontheotherhand,more
detailsonARCHmodelsandonnonlinearmodelshavebeenincluded,wherewe
drawfromthematerialina2000CambridgeUniversityPresstextbookbythefirst
Page35

Economics
twoauthors.Moreimportantly,thisfullyrevisedsecondeditioncontains
exercises.
Answerstoselectedexerciseswillbemadeavailableonaspecialwebsite.These
exercisesmatchwiththosepresentedatpastexamstoourstudents.
ThisbookwaswrittenduringouraffiliationwiththeEconometricInstituteat
theErasmusUniversityRotterdam.ThisInstituteisaverystimulatingteachingand
researchenvironment.Wewishtoexpressourgratitudetoour(then)colleagues
Teun
Kloek,ChristiaanHeij,HermanvanDijk,DennisFok,RichardPaap,AndreLucas,
MariusOomsandanonymousreviewersfortheirkindwillingnesstocommenton
someorallchapters
Theeconometricanalysisofeconomicandbusinesstimeseriesisamajorfieldof
researchandapplication.Thelastfewdecadeshavewitnessedanincreasing
interest
inboththeoreticalandempiricaldevelopmentsinconstructingtimeseriesmodels
andintheirimportantapplicationinforecasting.Thisbookaimsatreviewing
several
importantdevelopmentswithinthecontextofforecastingbusinessandeconomictime
series.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
Page36

Economics
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.
Itishopedthatthereaderfindsthematerialinthisbookhelpfultounderstand
why
suchnewmethodscanbeusefulforforecasting.
Althoughthisbookamountstoanintroductiontothefieldoftimeseriesanalysis
and
forecasting,itisnecessarythatthereaderhasknowledgeofintroductory
econometrics.
Specifically,regressionanalysis,matrixalgebraandvariousconceptsin
estimation
shouldbeincludedinthatknowledge.Thisbookshouldthenbeusefultoadvanced
undergraduatestudentsandgraduatestudentsinbusinessandeconomics,butalsoto
practitionersandappliedeconomistswhowishtoobtainafirst,butnottoo
technical,
impressionoftimeseriesforecasting.Infact,mostofthematerialhasalready
been
usedinTimeSeriesAnalysiscoursesforthirdyearundergraduatestudentsatthe
EconometricInstituteinRotterdameversince1996.
Thefirsteditionofthisbook(Franses(1998))containedmaterialthathasnow
beendeleted.Periodicmodelsforseasonaldataarenotincludedanymoreandalso
an
extensivediscussionofcommonfeatureshasbeendeleted.Ontheotherhand,more
detailsonARCHmodelsandonnonlinearmodelshavebeenincluded,wherewe
drawfromthematerialina2000CambridgeUniversityPresstextbookbythefirst
twoauthors.Moreimportantly,thisfullyrevisedsecondeditioncontains
exercises.
Answerstoselectedexerciseswillbemadeavailableonaspecialwebsite.These
exercisesmatchwiththosepresentedatpastexamstoourstudents.
ThisbookwaswrittenduringouraffiliationwiththeEconometricInstituteat
theErasmusUniversityRotterdam.ThisInstituteisaverystimulatingteachingand
researchenvironment.Wewishtoexpressourgratitudetoour(then)colleagues
Teun
Kloek,ChristiaanHeij,HermanvanDijk,DennisFok,RichardPaap,AndreLucas,
MariusOomsandanonymousreviewersfortheirkindwillingnesstocommenton
someorallchapters
Theeconometricanalysisofeconomicandbusinesstimeseriesisamajorfieldof
Page37

Economics
researchandapplication.Thelastfewdecadeshavewitnessedanincreasing
interest
inboththeoreticalandempiricaldevelopmentsinconstructingtimeseriesmodels
andintheirimportantapplicationinforecasting.Thisbookaimsatreviewing
several
importantdevelopmentswithinthecontextofforecastingbusinessandeconomictime
series.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
Page38

Economics
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletoget
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Page39

Economics
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingan

Itishopedthatthereaderfindsthematerialinthisbookhelpfultounderstand
why
suchnewmethodscanbeusefulforforecasting.
Althoughthisbookamountstoanintroductiontothefieldoftimeseriesanalysis
and
forecasting,itisnecessarythatthereaderhasknowledgeofintroductory
econometrics.
Specifically,regressionanalysis,matrixalgebraandvariousconceptsin
estimation
shouldbeincludedinthatknowledge.Thisbookshouldthenbeusefultoadvanced
undergraduatestudentsandgraduatestudentsinbusinessandeconomics,butalsoto
practitionersandappliedeconomistswhowishtoobtainafirst,butnottoo
technical,
impressionoftimeseriesforecasting.Infact,mostofthematerialhasalready
been
usedinTimeSeriesAnalysiscoursesforthirdyearundergraduatestudentsatthe
EconometricInstituteinRotterdameversince1996.
Thefirsteditionofthisbook(Franses(1998))containedmaterialthathasnow
beendeleted.Periodicmodelsforseasonaldataarenotincludedanymoreandalso
an
extensivediscussionofcommonfeatureshasbeendeleted.Ontheotherhand,more
detailsonARCHmodelsandonnonlinearmodelshavebeenincluded,wherewe
drawfromthematerialina2000CambridgeUniversityPresstextbookbythefirst
twoauthors.Moreimportantly,thisfullyrevisedsecondeditioncontains
exercises.
Answerstoselectedexerciseswillbemadeavailableonaspecialwebsite.These
exercisesmatchwiththosepresentedatpastexamstoourstudents.
ThisbookwaswrittenduringouraffiliationwiththeEconometricInstituteat
theErasmusUniversityRotterdam.ThisInstituteisaverystimulatingteachingand
researchenvironment.Wewishtoexpressourgratitudetoour(then)colleagues
Teun
Kloek,ChristiaanHeij,HermanvanDijk,DennisFok,RichardPaap,AndreLucas,
Page40

Economics
MariusOomsandanonymousreviewersfortheirkindwillingnesstocommenton
someorallchapters
Theeconometricanalysisofeconomicandbusinesstimeseriesisamajorfieldof
researchandapplication.Thelastfewdecadeshavewitnessedanincreasing
interest
inboththeoreticalandempiricaldevelopmentsinconstructingtimeseriesmodels
andintheirimportantapplicationinforecasting.Thisbookaimsatreviewing
several
importantdevelopmentswithinthecontextofforecastingbusinessandeconomictime
series.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Page41

Economics
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletoget
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.

Page42

Economics
Itishopedthatthereaderfindsthematerialinthisbookhelpfultounderstand
why
suchnewmethodscanbeusefulforforecasting.
Althoughthisbookamountstoanintroductiontothefieldoftimeseriesanalysis
and
forecasting,itisnecessarythatthereaderhasknowledgeofintroductory
econometrics.
Specifically,regressionanalysis,matrixalgebraandvariousconceptsin
estimation
shouldbeincludedinthatknowledge.Thisbookshouldthenbeusefultoadvanced
undergraduatestudentsandgraduatestudentsinbusinessandeconomics,butalsoto
practitionersandappliedeconomistswhowishtoobtainafirst,butnottoo
technical,
impressionoftimeseriesforecasting.Infact,mostofthematerialhasalready
been
usedinTimeSeriesAnalysiscoursesforthirdyearundergraduatestudentsatthe
EconometricInstituteinRotterdameversince1996.
Thefirsteditionofthisbook(Franses(1998))containedmaterialthathasnow
beendeleted.Periodicmodelsforseasonaldataarenotincludedanymoreandalso
an
extensivediscussionofcommonfeatureshasbeendeleted.Ontheotherhand,more
detailsonARCHmodelsandonnonlinearmodelshavebeenincluded,wherewe
drawfromthematerialina2000CambridgeUniversityPresstextbookbythefirst
twoauthors.Moreimportantly,thisfullyrevisedsecondeditioncontains
exercises.
Answerstoselectedexerciseswillbemadeavailableonaspecialwebsite.These
exercisesmatchwiththosepresentedatpastexamstoourstudents.
ThisbookwaswrittenduringouraffiliationwiththeEconometricInstituteat
theErasmusUniversityRotterdam.ThisInstituteisaverystimulatingteachingand
researchenvironment.Wewishtoexpressourgratitudetoour(then)colleagues
Teun
Kloek,ChristiaanHeij,HermanvanDijk,DennisFok,RichardPaap,AndreLucas,
MariusOomsandanonymousreviewersfortheirkindwillingnesstocommenton
someorallchapters
Theeconometricanalysisofeconomicandbusinesstimeseriesisamajorfieldof
researchandapplication.Thelastfewdecadeshavewitnessedanincreasing
interest
inboththeoreticalandempiricaldevelopmentsinconstructingtimeseriesmodels
andintheirimportantapplicationinforecasting.Thisbookaimsatreviewing
several
importantdevelopmentswithinthecontextofforecastingbusinessandeconomictime
series.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
Page43

Economics
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.
Afullblowntextbookonallaspectsoftimeseriesanalysiswillcoverthousands
ofpages.Forexample,thefieldofunitrootanalysishasexpandedinthelast
three
decadeswithsuchapaceandvariationthatabookonlyonthistopicwouldtake
morepagesthanthecurrentbookdoes.Thisbookisthereforenotintendedtobea
surveyofallthatisavailableandthatcanbedoneintimeseriesanalysis.
Obviously,
suchaselectioncomeswithacost,thatis,thediscussionwillsometimesnotbe
as
theoreticallypreciseassomereaderswouldhaveliked.Merely,itisourpurpose
that
thereadersshouldbeabletogeneratetheirownforecastsfromtimeseriesmodels
that
Page44

Economics
adequatelydescribethekeyfeaturesofthedata,toevaluatetheseforecastsand
tocome
upwithsuggestionsforpossiblemodificationsifnecessary.Insomeinteresting
cases,
though,wealsorecommendfurtherreading.Toattainthis,wemakeaselection
between
allthepossibleroutestoconstructingandevaluatingtimeseriesmodels,between
all
thepossibleestimationmethods,andbetweenallthevariousteststhatcanbe
used.
Basically,ourchoiceisalsomotivatedbytheavailabilityofmethodsinsuch
statistical
packagesasEviews,whilesometimesalittlebitofGauss,RorMatlabprogramming
isneeded.Infact,allempiricalresultsinthisbookarethusobtained.An
additional
motivationforourchoiceisgivenbyourownpracticalexperienceinforecasting
businessandeconomictimeseries.Thisexperienceisalsobasedonsupervising
projectsofoureconometricsundergraduatestudentsduringtheirinternshipsat
banks,
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletoget
investmentcompanies,andconsultancyagencies.
Thesecondpurposewiththisbookisthatthereaderwillbeabletogetsome
understandingofnovelapproachesreportedinrecentandfutureissuesof,say,the
JournalofTimeSeriesAnalysis,JournalofEconometrics,JournalofBusinessand
EconomicStatistics,JournalofForecasting,InternationalJournalofForecasting,
Journal
ofAppliedEconometricsandtheJournaloftheAmericanStatisticalAssociation.

Page45