Assignment
Robert Kohn
UNSW School of Business
University of New South Wales
ECON 2024
March 13, 2024
Please work in groups of 3 and hand in your solution by 6 pm, April 12th.
The object of forecasting is to produce a method to predict future values
of one or more series. Usually we also wish to have some measure of the
uncertainty of the forecast, and this is expressed in terms of a prediction
interval(s), e.g., you may give a 70% , 80% and 95% PI’s.
There is often an underlying model behind the forecast method, such that
the forecast method is optimal for that model. The prediction intervals are
often also based on this model.
In modelling, and in particular forecasting, you will want to choose be-
tween models to find the model that predicts best, or which model makes
better intuitive sense when two models are nearly equally good at prediction.
Note that you should avoid assessing how well a model predicts by seeing how
close the fitted values are to the observed yt. That is, choosing a model by
doing in-sample prediction. This also applies to choosing between predictive
models based on in-sample prediction. For that you need a validation sample;
or you do time series cross-validation; or cross-validation when appropriate.
For your analysis, please pick a time series that exhibits both trend
and seasonality and develop a forecasting model, where the final model you
present should aim to satisfy the various criteria for a good model specified
in the book and the lecture notes.
In your work, you should:
(a) Develop a forecasting model based on exponential smoothing. That
may mean considering several exponential smoothing models and then
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choosing the best one using one or more criteria.
(b) Repeat for a forecasting model based on an ARIMA approach.
(c) Compare your preferred exponential smoothing model with your pre-
ferred ARIMA model using time series cross-validation.
By March 18 please send Yangui and I a) the names of the people in your
group; c) the role of each member of the group; c) a description of the time
series chosen. If too many groups choose a certain time series, we may direct
you to choose a different one. In your submission, please also report the role
played by each person in the group.
The report should consist of a summary of what you achieved which is
half a page to a page, the body of the report which contains the main result
and recommendations of the study, and is 3 to 5 pages in length. You can
also have a technical appendix with some extra maths and plots, but make
sure that the report (excluding the appendix) is self sufficient by itself.