Muhammad Akram () (Department of Econometrics and Business Statistics) Rob J Hyndman () (Department of Econometrics and Business Statistics,Monash University) J. Keith Ord () (McDonough School of Business,Georgetown University)
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The most common forecasting methods in business are based on exponential smoothing and the most common time series in business are inherently non-negative. Therefore it is of interest to consider the properties of the potential stochastic models underlying exponential smoothing when applied to non-negative data. We explore exponential smoothing state space models for non-negative data under various assumptions about the innovations, or error, process. We first demonstrate that prediction distributions from some commonly used state space models may have an infinite variance beyond a certain forecasting horizon. For multiplicative error models which do not have this flaw, we show that sample paths will converge almost surely to zero even when the error distribution is non-Gaussian. We propose a new model with similar properties to exponential smoothing, but which does not have these problems, and we develop some distributional properties for our new model. We then explore the implications of our results for inference, and compare the short-term forecasting performance of the various models using data on the weekly sales of over three hundred items of costume jewelry. The main findings of the research are that the Gaussian approximation is adequate for estimation and one-step-ahead forecasting. However, as the forecasting horizon increases, the approximate prediction intervals become increasingly problematic. When the model is to be used for simulation purposes, a suitably specified scheme must be employed.
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Paper provided by The George Washinton University, Department of Economics, Research Program on Forecasting in its series Working Papers with number
2008-003.
Find related papers by JEL classification: C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General C5 - Mathematical and Quantitative Methods - - Econometric Modeling
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