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# Methods and Applications

Third Edition

Spyros Makridakis

Steven C. Wheelwright

Rob J. Hyndman
Monash University, Department of
Mathematics and Statistics

## John Wiley & Sons, Inc.

CONTENTS
2/5 Prediction intervals 52
1 THE FORECASTING
2/6 Least sQuares estimates 54
PERSPECTIVE
26/1 Discovering and describing
I/I Why forecast? 2 relationships 59
1/2 An overview of forecasting 2/7 Transformations and
1/2/1 Explanatory versus time series 2/7/1 Mathematical transformations 63
forecasting 10 2/7/2 Calendar adjustments 67
1/2/2 Qualitative forecasting 12 2/7/3 Adjustments for inflation and
population changes 70
13 The basic steps in a forecasting
References and selected 2-A Notation for Quantitative
forecasting 71
bibliography 17
2-B Summation sign 72
Exercises 19 References and selected
bibliography 74
2 BASIC FORECASTING Exercises 76
TOOLS 20
3 TIMESERIES
21 Time series and cross-sectional
data 21 DECOMPOSITION 81
2/2 Graphical summaries 23 31 Principles of decomposition 84
22/1 Time plots and time series 31/1 Decomposition models 84
patterns 24 31/2 Decomposition graphics 87
22/2 Seasonal plots 26 31/3 Seasonal adjustment 88
2/2/3 Scatterplots 27
32 Moving averages &9
2/3 Numerical summaries 28 32/1 Simple moving averages
2/3/1 Univariate statistics 29 32/2 Centered moving averages 94
2/V2 Bivariate statistics 34 32/3 Double moving averages 98
Autocorrelation 38 32/4 Weighted moving averages 98

## 24 Measuring forecast accuracy 41 33 Local regression smoothing 101

24/1 Standard statistical measures 42 3V1 Loess 104
2/4/2 Out-of-sample accuracy 3/4 Classical decomposition 106
measurement 45
2/4/3 Comparing forecast methods 46
2/4/4 Theils U-statistic 48 34/2 Multiplicative decomposition 109
2/4/S ACF of forecast error 50
34/3 Variations on classical 4 initialization 174
decomposition 12 4/5/2 Optimization 176
4/5/3 Prediction intervals 177
3/5 Census Bureau methods 113
35/1 First Iteration 114 References and selected
3/5/2 Later Iterations 118 bibliography 179
15/3 Extensions to X-I2-ARIMA 119
Exercises 181
3/6 STL decomposition 121
36/1 Inner loop 122
36/2 Outer loop 123 5 SIMPLE REGRESSION 185
choosing the STL parameters 124 S Regression methods 186
36/4 Comparing STL with
X-I2-AR1MA 124 5/2 Simple regression 187
37 Forecasting and 5 Least SQuares estimation 188
decomposition 125 52/2 The correlation coefficient 193
5 3 Cautions In using correlation 196
References and selected 5/2/4 Simple regression and the
bibliography 127 correlation coefficient 198
5/2/5 Residuals, outliers, and
Exercises 130 influential observations 203
5/2/6 Correlation and causation 208
5/3 Inference and forecasting with
4 EXPONENTIAL SMOOTHING
simple regression 2 0 8
METHODS 135 5/3/1 Regression as statistical
4/1 The forecasting scenario 138 modeling 209
5 2 The F-test for overall
4/2 Averaging methods 141 significance 211
4/2/1 The mean 141 5/3/3 Confidence intervals for individual
42/2 Moving averages 142 coefficients 215
5/3/4 i-tests for Individual
4/3 Exponential smoothing coefficients 217
methods 147 5/3/5 Forecasting using the simple
4 Single exponential regression model 218
smoothing 147 5/4 Non-linear relationships 221
4/3/2 Single exponential smoothing:
an adaptive approach 155 5/4/1 Non-linearity In the
4/3/3 Hofs linear method 158 parameters 222
4/3/4 Holt-Winters' trend and 5/4/2 Using logarithms to form linear
seasonality method 161 models 224
4/5/5 Exponential smoothing: Pegels* 5/4/3 Local regression 224
classification 169 Appendixes 228
4/4 A comparison of methods 171 5-A Determining the values of a
andb 228
4/5 General aspects of smoothing
methods 174
References and selected 6/6 Econometric models 299
bibliography 230 6/6/1 The basis of econometric
modeling 299
Exercises 231 6/6/2 The advantages and drawbacks
of econometric methods 301
6/ MULTIPLE REGRESSION 240 Appendixes 303
6 A The Durbln-Watson statistic 303
6/1 Introduction to multiple linear
regression 241 References and selected
bibliography 305
6/1/1 Multiple regression model:
theory and practice 248 Exercises 306
6//I/2 Solving for the regression
coefficients 250
6/1/3 Multiple regression and the 7 THE BOX-JENKINS
coefficient of determination 251
6/1/4 The F-test for overall METHODOLOGY FOR
significance 252
6 S Individual coefficients: confidence ARIMA MODELS 311
intervals and Nests 255
6 6 The assumptions behind multiple
7/1 Examining correlations in times
linear regression models 259
series data 313
62 Regression with time series 263 7/1/1 The autocorrelation function 313
6 Checking Independence of 7/1/2 A white noise model 317
residuals 265 7/1/3 The sampling distribution of
6/2/2 Time-related explanatory autocorrelations 317
variables 269 7/1/4 Portmanteau tests 318
7/1/5 The partial autocorrelation
6/3 Selecting variables 274 coefficient 320
6 The long list 276 7/1/6 Recognizing seasonality in a
6 The short list 277 time series 322
6 3 Best subsets regression 279 7/1/7 Example: Pigs slaughtered 322
6/3/4 Stepwise regression 2 SS
7/2 Examining stationarity of time
6/4 Multicollinearity 287 series data 324
6/4/1 Multicollinearity when there are 7/2/1 Removing non-stationarity in a
two regressors 289 time series 326
6 2 Multicollinearity when there are 7/2/2 A random walk model 329
more than two regressors 289 7/2/3 Tests for statationarity 329
65 Multiple regression and 7/2/4 Seasonal differencing 331
7/2/5 Backshift notion 334
forecasting 291
6/5/1 Example: cross-sectional 7/3 ARIMA models for times series
regression and forecasting 292 data 335
6/5/2 Example: time series regression 7/3/1 An autoregressive model of
and forecasting 294 order one 337
6/5/3 Recapitulation 298

xi
References and selected The accuracy of forecasts In
bibliography 440 financial and other markets 484
10/1/2 Non-investment type
Exercises 444 forecasts 490
10/2 The nature of judgmental biases
9 FORECASTING THE LONG- and limitations 492
10/2/1 Judgmental biases in
TERM 4SI forecasting 493
9/1 Cycles versus long-term trends: 10/2/2 Dealing with judgmental
biases 4 %
forecasting copper prices 452 10/2/3 Conventional wisdom 502
9 Forecasting IBM's sales 457
Combining statistical and
9/2 Long-term mega economic judgmental forecasts S03
trends 459 Arriving at final forecasts during
9 Cycles of various durations and a budget meeting 503
depths 461
9 Implications of extrapolating 10/4 Conclusion 508
long-term trends 464 References and selected
9/3 Analogies 466 bibliography 509
9 V I The Information versus the Exercises 512
Industrial Revolution 467
Five major Inventions of the
Industrial Revolution and their
analogs 469 THE USE OF FORECASTING
9/4 Scenario building 472 METHODS IN PRACTICE
9/4/1 Businesses: g3lnlng and or 514
maintaining competitive
9/4/2 Jobs, work, and leisure time 47S users 515
9/4/3 Physical versus tele-interactions: Familiarity and satisfaction with
extent and speed of major forecasting methods 516
acceptance 476 The use of different forecasting
methods 520
References and selected
bibliography 478 11/2 Post-sample accuracy: empirical
findings 525
Exercises 480
11/3 Factors influencing method
selection 532
10 JUDGMENTAL FORECASTING
11/4 The combination of forecasts 537
AND ADJUSTMENTS 482 11/4/1 Factors that contribute to making
10/1 The accuracy of judgmental combining work 538
11/4/2 An example of combining 539
forecasts 483
References and selected 1/2 Statistics packages 578
1/3 Specialty forecasting packagjes 579
bibliography S43 1/4 Selecting a forecasting
Exercises 547 package 582
2 Forecasting associations 583
IMPLEMENTING 3 Forecasting conferences 585
FORECASTING: ITS USES, 4 Forecasting journals and
5 Forecasting on the Internet 586
LIMITATIONS 549
References and selected
12/1 What can and cannot be
bibliography 588
predicted 551
12/1/1 Short-term predictions 553
12/17 Medium-term predictions 554
12/ie Long-term predictions 557
APPENDIX
12/2 Organizational aspects of FORECASTING TERMS 589
forecasting 558
12/2/1 Correcting an organization's APPENDIX /STATISTICAL
forecastIng problems 561
12/2/2 Types of forecasting problems TABLES 549
and their solutions 562
A: Normal probabilities 620
12/3 Extrapolative predictions versus B: Critical values for t-statistic 621
creative insights 5 6 7
C: Critical values for F-statistic 622
12/3/1 Hindsight versus foresight 569
D: Inverse normal table 628
12/4 Forecasting in the future 571
E: Critical values for statistic 629
Data. Information, and
forecasts F: Values of the Durbin-Watson
12/4/2 Collective knowledge, experience. statistic 630
and forecasting 572
G: Normally distributed observations 632
References and selected
bibliography 575
AUTHOR INDEX 633
Exercises 576
SUBJECT INDEX 636
APPENDIX I / FORECASTING
RESOURCES 577
Forecasting software 578