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Methods and Applications

Third Edition

Spyros Makridakis
European Institute of Business
Administration (INSEAD)

Steven C. Wheelwright
Harvard University, Graduate
School of Business Administration

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
techniques 6 adjustments 63
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
task 13 Appendices 71
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
34/1 Additive decomposition 107
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
advantages 472 Surveys among forecasting
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
newsletters 585
ADVANTAGES, 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
Spreadsheets
THE FORECASTING PERSPECTIVE
11 Why forecast? 2 1/3 The basic steps in a forecasting
1/2 An overview of forecasting
techniques 6 References and selected
1/2/1 Explanatory versus time series bibliography 17
forecasting 10
1/2/2 Qualitative forecasting 12 exercises W