Five Steps in A Forecasting Task
Five Steps in A Forecasting Task
Five Steps in A Forecasting Task
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Step 1: Problem definition.
To define the problem, get the following
questions answered.
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To define the problem
continued…
Also, one should set up meetings with
everyone involved with this project,
namely those:
Maintaining databases.
Collecting data.
Using data for future planning, etc.
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Step 2: Gathering information
There are generally two kinds of
information available.
– I) statistical data (which is generally historic
numerical data).
– Ii) the accumulated judgment and
expertise of key personnel.
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Other relevant information
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Step 3: Preliminary
exploratory analysis
It is to answer what do the data tell
us?
– Using graphic tools.
– Descriptive statistics.
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Another tool
Another useful tool is decomposition
analysis.To answer:
Are there consistent patterns?
Is there a significant trend: is
seasonality important?
Is there evidence of the presence of.
Business cycles?
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Preliminary analysis
continued…
Are there any outliers? That needs to be
commented upon by experts in the field.
How strong are the relationships among
the variables available for analysis?
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Step 4: Choosing and fitting
models
Models to be fitted could be:
Exponential smoothing methods,
regression models, box-Jenkins
ARIMA models, non-linear models,
regression with ARIMA errors,
intervention models, transfer function
models, multivariate ARMA models,
and state space models.
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Fitting models
Once a model has been judiciously
selected, its parameters are estimated
for model fitting purposes.
When forecasting is long-term then a
less formal approach is preferred.
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Step 5: Using and evaluating
a forecasting model
The fitted model's pros and cons are
evaluated over time.
The performance of the model can only
be properly evaluated after the data for
the forecast period have become
available.
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evaluating a forecasting
model
There are many measures for
evaluating both fitting and forecasting
errors.
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Using a forecasting model
If the forecast suggests a gloomy
picture ahead, then management will do
its best to try to change the scenario so
that the gloomy forecast will not come
true.
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Using forecasting model
continued…
If the forecasts suggest a positive
future, then management must try to
use this forecast to enhance the
likelihood of a favorable outcome.
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