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REVIEWS OF BOOKS ON FORECASTING

Principles of Forecasting Web Site

Francis V. Diebold, Elements of Forecasting. Cincinnati: South-Western College Publishing, 1998.

Reviewed by: Frederick L. Joutz, Department of Economics, The George Washington University,
Washington, DC, published in the International Journal of Forecasting, 14 (1998), 535-
536.

Elements of Forecasting is an excellent textbook for time series modeling and forecasting at the MBA and
advanced undergraduate level. The book is well organized with numerous empirical data sets and
examples which apply the statistical methods. There is a data diskette which accompanies the book and
includes sample programs in the E-views econometric software in addition to data for all the examples in
the book. Diebold adheres to the Keep It Sophisticatedly Simple (KISS) principle.

Elements begins by asking the reader to consider six issues before undertaking a forecasting task. These
are critical to producing forecast(s) valuable to the producer and user. The questions are: What is the
decision-making environment? What is the objective of the forecast? Will the forecast be a single value or
will it include measures of uncertainty? What is the forecast horizon? What is the information set for the
forecast? Which forecasting methodology or methodologies will be used? The final question reveals the
author's priorities when forecasting. The forecaster needs to understand the who, what, where, and why
before crunching away with statistical/ econometric software or a spreadsheet.

The focus of the Chapter 3 is on data analysis. This essential element of the modeling and forecasting
process is often neglected in textbooks and in practice by beginners and even experienced forecasters. It is
important for checking the quality and understanding patterns in the data. Diebold also provides the
readers with do's and don'ts for presenting graphs. My students learned the importance of these
ocularmetric methods in researching and collecting data for their projects.

The decomposition of a time series is covered in the next six chapters. The discussion in Chapter 4 begins
with an analysis of deterministic trends and compares linear and nonlinear forms. This is followed by
adjusting the time series for seasonal factors, Chapter 5. There is an excellent set of empirical examples
with graphical analysis comparing the different trend models with trend models plus seasonal factors.
These examples brought home the issues discussed in Chapter 3 on the importance of graphical analysis
in the modeling phase as well. The next two chapters examine the issues related to identifying and
modeling cycles. Forecasting with univariate models is covered in the last two chapters of the section.
Chapter 8 demonstrates forecasts of cycles presenting both point, interval, and multihorizon estimates.
The last chapter of the section brings together the modeling and forecasting of trend, seasonal, and
cyclical components.

Every econometrics and forecasting textbook has several nuggets which go beyond the standard coverage
and illustrate a particular point important to practitioners. For example, Diebold provides intuitive,
algebraic, and empirical examples using the AIC and Schwartz Criterion for model selection in Chapter 3
on deterministic trends, and Chapter 9 on putting the three time series components together in a
forecasting model. In addition, he explains and discusses results from using recursive estimation
techniques for model stability testing. I would like to have seen a discussion of constructing confidence
intervals for forecasts after transformations to natural logs. Because Diebold spends a fair amount of time
on exponential models and uncertainty, such a discussion seemed natural and would have been useful.
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Chapter 10 covers the important issues of identifying and testing for Unit Roots, ARIMA modeling and
Smoothing Techniques. The mathematical issues will be above the skill level of most students. It will
therefore require the instructor to be selective in covering this material.

Chapter 11 explains forecasting with regression models and the distinctions between conditional and
unconditional forecasting models. Again, the mathematics of difference equations will prove rough for all
but the best students. There is a nice introduction to VAR techniques in this chapter.

The book concludes with evaluating and combin ing forecasts. He motivates the analytical and empirical
discussion with a horse race between two period ahead forecasts. This includes summary statistics for
individual historical forecasts, statistics comparing forecast accuracy, and regression based information
encompassing and combination.

The Problems and Complements section at the end of each chapter are of the thought provoking variety
that can stimulate discussion about forecasting problems. I would have liked to see two or three more
analytical or empirical questions related to data sets not used in the book. Also, there is a Bibliographical
and Computational Notes section at the end of the chapter. This provides excellent sources for data,
books, journals, and of particular relevance today sites on the World Wide Web.

I would recommend this book to anyone teaching an introductory forecasting course, whether upper-level
undergraduates, MBA students, or professional courses. It covers the fundamental analytical issues with
excellent empirical examples which the students can replicate with their own software.