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Autoregressive Model

The document describes developing a second-order autoregressive (AR(2)) model to forecast the number of office units acquired by the Office Concept Corp. over 8 years. An AR(2) model is fitted to the historical data, resulting in the equation Yt = 3.5 + 0.8125Yt-1 - 0.9375Yt-2. This model is then used to forecast units for 2006 and 2008, demonstrating chain forecasting where the previous year's forecast is input to forecast the next year. The mean forecast error is also calculated to construct a 95% confidence interval for the 2008 forecast.

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JorgeZafra
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163 views9 pages

Autoregressive Model

The document describes developing a second-order autoregressive (AR(2)) model to forecast the number of office units acquired by the Office Concept Corp. over 8 years. An AR(2) model is fitted to the historical data, resulting in the equation Yt = 3.5 + 0.8125Yt-1 - 0.9375Yt-2. This model is then used to forecast units for 2006 and 2008, demonstrating chain forecasting where the previous year's forecast is input to forecast the next year. The mean forecast error is also calculated to construct a 95% confidence interval for the 2008 forecast.

Uploaded by

JorgeZafra
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Autoregressive Model: Example

The Office Concept Corp. has acquired a number of


office units (in thousands of square feet) over the last 8
years. Develop the 2nd order Autoregressive models.
Year Units
98
99
00
01
02
03
04
05

4
3
2
3
2
2
4
6

Autoregressive Model: Example


Solution
Year
Y
Y
Y
Develop the 2nd order
table

Use Excel to run a


regression model
Excel Output
Coefficients
Intercept
3,5
X Variable 1
0,8125
X Variable 2
-0,9375

98
99
00
01
02
03
04
05

4
3
2
3
2
2
4
6

i-1

--4
3
2
3
2
2
4

n = 6!!!

Yt 3,5 0,8125Yt 1 0,9375Yt 2

i-2

----4
3
2
3
2
2

Autoregressive Model Example:


Forecasting
Use the 2nd order model to forecast number of
units for 2006:

Yt 3,5 0,8125Yt 1 0,9375Yt 2

Y2006 3,5 0,8125Y2005 0,9375Y2004


3,5 0,8125 6 0,9375 4
4,625

Autoregressive Model Example:


Forecasting
Use the 2nd order model to forecast number of
units for 2008:

Yt 3,5 0,8125Yt 1 0,9375Yt 2

Y2008 3,5 0,8125Y2007 0,9375Y2006


3,5 0,8125 ?? 0,9375 4,625
??

CHAIN FORECAST

Autoregressive Model Example:


Forecasting
If we want to forecast number of units for 2008,
first we need to forecast the number of units for
2007:

Y2007 3,5 0,8125Y2006 0,9375Y2005


3,5 0,8125 4,6245 0,9375 6
1,633

Autoregressive Model Example:


Forecasting
Now we can forecast number of units for 2008:

Yt 3,5 0,8125Yt 1 0,9375Yt 2

Y2008 3,5 0,8125Y2007 0,9375Y2006


3,5 0,8125 1,633 0,9375 4,625
0,491

Autoregressive Model Example:


Mean Forecast Error
Lets construct the forecast interval for 2008.
We need MFE:
1
1 1
5,5
MFE S e 1 [1 1,633 4,625] 1 0,3125 0,0625 1,633
1 0,0625 0,3125 4,625

MFE 1,49 2,45 2,3318

Autoregressive Model Example:


Confidence Interval for Forecast
P{Y2008 t ,nk MFE EY2008 Y2008 t ,nk MFE} 1
t ,nk t 0,05;63 3,182
P{0,491 3,182 2,3318 EY2008 0,491 3,182 2,3318} 1 0,05
P{6,9288 EY2008 7,9108} 0,95

Why?
B1 or B2 can be statistically insignificant
Determination coefficient too low
Improper autoregression rank (p2)

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