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Practical Business Forecasting


Stressing the concrete applications of economic forecasting, Practical Business Forecasting is accessible to a wide-range of readers, requiring only a familiarity with basic statistics. The text focuses on the use of models in forecasting, explaining how to build practical forecasting models that produce optimal results. In a clear and detailed format, the text covers estimating and forecasting with single and multi- equation models, univariate time-series modeling, and determining forecasting accuracy. Additionally, case studies throughout the book illustrate how the models are actually estimated and adjusted to generate accurate forecasts. After reading this text, students and readers should have a clearer idea of the reasoning and choices involved in building models, and a deeper foundation in estimating econometric models used in practical business forecasting.

Data and models are are available at:

Dr. Michael K. Evans formerly taught at the Kellogg School at Northwestern University. Since 1981 has headed Evans, Carroll & Associates (formerly Evans Economics), and has generated thousands of forecasts at the macroeconomic, financial, industry, and individual company level. He was awarded the Annual Blue Chip Economic Forecasting Award in 1999 for the most accurate macroeconomic forecasts over the past four years

Part I: Choosing the Right Type of Forecasting Model:.


1. Statistics, Econometrics, and Forecasting.

2. Concept of Forecast Accuracy: Compared to What?.

Structural Shifts in Parameters.

Model Misspecification.

Missing, Smoothed, Preliminary, or Inaccurate Data.

Changing Expectations by Economic Agents.

Policy Shifts.

Unexpected Changes in Exogenous Variables.

Incorrect Assumptions about Exogenity.

Error Buildup in Multi-Period Forecasts.

3. Alternative Types of Forecasts:.

Point or Interval.

Absolute or Conditional.

Alternative Scenarios Weighed by Probabilities.


Single or Multi Period.

Short Run or Long Range.

Forecasting Single or Multiple Variables.

4. Some Common Pitfalls in Building Forecasting Equations:.

Part II: Useful Tools for Practical Business Forecasting:.


5. Types and Sources of Data:.

Time Series, Cross Section, and Panel Data.

Basic Sources of U.S. Government Data.

Major Sources of International Government Data.

Principal Sources of Key Private Sector Data.

6. Collecting Data from the Internet:.

7. Forecasting Under Uncertainty.

8. Utilizing Graphs and Charts.

9. Mean and Variance.

10. Goodness of Fit Statistics:.

Covariance and Correlation Coefficients.

Standard Errors and t-ratios.

F-ratios and Adjusted R-squared.

11. Using the EViews Statistical Package.

12. Utilizing Graphs and Charts.

13. Checklist Before Analyzing Data.

Adjusting for Seasonal Factors.

Checking for Outlying Values.

14. Using Logarithms and Elasticities.

Part III: The General Linear Regression Model:.


15. The General Linear Model:.

The Bivariate Case.

Desirable Properties of Estimators.

Expanding to the Multivariate Case.

16. Uses and Misuses of R-Bar Squared:.

Differences Between R-Square and R-Bar Square.

Pitfalls in Trying to Maximize R-Bar Square.

An Example: the Simple Consumption Function.

17. Measuring And Understanding Partial Correlation:.

Covariance and the Correlation Matrix.

Partial Correlation Coefficients.

Pitfalls Of Stepwise Regression.

18. Testing and Adjusting for Autocorrelation:.

Why Autocorrelation Occurs and What it Means.

Durbin-Watson Statistic to Measure Autocorrelation.

Autocorrelation Adjustments: Cochrane-Orcutt and Hildreth-Lu.

Higher Order Autocorrelation.

Overstatement of t-ratios When Autocorrelation is Present.

Pitfalls of Using the Lagged Dependent Variable.

19. Testing and Adjusting for Heteroscedasticity:.

Causes of Heteroscedasticity in Cross-Section and Time-Series Data.

Measuring and Testing for Heteroscedasticity.

20. Getting Started: An Example in Eviews:.

Case Study #1: Predicting Retail Sales for Hardware Stores.

Case Study #2: German Short-Term Interest Rates.

Case Study #3: Lumber Prices.

Part IV: Additional Topics for Single-Equation Regression Models:.


21. Problems Caused by Multicollinearity.

22. Eliminating or Reducing Spurious Trends:.

Case Study #4. Demand for Airline Travel.

Log-Linear Transformation.

Percentage First Differences.


Deviations Around Trends.

Weighted Least Squares.

Summary and Comparison of Methods.

23. Distributed Lags:.

General Discussion of Distributed Lags.

Polynomial Distributed Lags.

General Guidelines for Using PDLs.

24. Treatment of Outliers and Issues of Data Adequacy.


Missing Observations.

General Comments of Data Adequacy.

25. Uses and Misuses of Dummy Variables:.

Single-Event Dummy Variables.

Changes in Dummy Variables for Institutional Structure.

Changes in Slope Coefficients.

26. Nonlinear Regressions:.

Log-Linear Regressions.

Quadratic and Other Powers, Including Inverse.

Ceilings, Floors, and Kronecker Deltas: Linearizing with Dummy Variables.

27. General Steps For Formulating A Multiple Regression Equation.

Case Study #5: The Consumption Function.

Case Study #6: Capital Spending.

Part V: Forecasting with a Single-Equation Regression Model:.


28. Checking for Normally Distributed Residuals:.

Higher Order Tests for Autocorrelation.

Tests For Heteroscedasticity.

29. Testing for Equation Stability and Robustness:.

Chow Test for Equation Stability.

Ramsey RESET Test to Detect Misspecification.

Recursive Least Squares - Testing Outside The Sample Period.

Additional Comments on Multicollinearity.

Case Study #7: Demand for Motor Vehicles.

30. Evaluating Forecast Accuracy.

31. The Effect of Forecasting Errors in the Independent Variables.

Case Study #8: Housing Starts.

32. Comparison with Naïve Models:.

Same Level or Percentage Change.

Naïve Models Using Lagged Values of the Dependent Variables.

33. Adjusting the Coefficients of the Model When Forecasting.

34. Buildup of Forecast Error Outside the Sample Period:.

Increased Distance from the Mean Value.

Unknown Values of Independent Variables.

Error Buildup in Multi Period Forecasting.

Case Study #9: The Yen/Dollar Crossrate.

Part VI: Elements Of Univariate Time-Series Methods:.


35. The Basic Time-Series Decomposition Model.

Case Study #10. General Merchandise Sales.

Identifying the Trend.

Measuring the Seasonal Factor.

Separating Cyclical and Irregular Components.

36. Linear and Nonlinear Trends.

37. Methods of Smoothing Data:.

Arithmetic Moving Averages.

Exponential Smoothing.

Holt-Winters Method.

Hodrick-Prescott Filter.

38. Methods of Seasonal Adjustment:.

Arithmetic and Multiplicative Fixed Weights.

Variable Weights.

Treatment of Outlying Observations.

Seasonal Adjustment Factors with the Census Bureau X-11 Program.

Case Study #11 : Manufacturing Inventory Stocks for Textile Mill Products.

Case Study #12: Seasonally Adjusted Gasoline Prices.

Part VII: Univariate Time Series Modeling and Forecasting:.


39. Box-Jenkins Philosophy: Combining Theoretical and Practical Forecasts.

40. ARIMA Models:.

First-Order Autoregressive Models - AR(1).

AR(2) Models.

AR(N) Models.

Moving Average Models.

ARMA Procedures.

41. Stationary and Integrated Series.

42. Identification.

43. Seasonal Factors in ARMA Modeling.

44. Estimation of ARMA Models.

45. Diagnostic Checking and Forecasting.

Case Study #13: New Orders for Machine Tools.

Case Study #14: Inventory/Sales (I/S) Ratio for SIC 37 (Transportation Equipment).

Case Study #15: Nonfarm Payroll Employment.

Part VIII: Combining Forecasts:.


46. Outline of the Theory of Forecast Combination.

47. Major Sources of Forecast Error.

48. Combining Methods of Nonstructural Estimation.

49. Combining Structural and Nonstructural Methods.

Case Study #16: Purchases of Consumer Durables.

50. The Role of Judgment in Forecasting:.

Surveys of Sentiment and Buying Plans.

Sentiment Index for Prospective Home Buyers.

51. The Role of Consensus Forecasts.

Case Study #17: Predicting Interest Rates by Combining Structural and Consensus Forecasts.

52. Adjusting Constant Terms and Slope Coefficients:.

Advantages and Pitfalls of Adjusting the Constant Term.

Estimating Shifting Parameters.

53. Combining Forecasts: Summary.

Case Study #18: Improving the Forecasting Record for Inflation.

Part IX: Building and Presenting Short-Term Sales Forecasting Models:.


54. Organizing the Sales Forecasting Procedure.

55. Endogenous and Exogenous Variables in Sales Forecasting:.

Macroeconomic Variables.

Variables Controlled by the Firm.

Variables Reflecting Competitive Response.

56. The Role of Judgment:.

Deflecting Excess Optimism.

The Importance of Accurate Macroeconomic Forecasts.

Assessing Judgmental Inputs.

57. Presenting Sales Forecasts:.

Purchases of Construction Equipment.

Retail Furniture Sales.

Case Study #19: The Demand for Bicycles.

Case Study #20: New Orders for Machine Tools.

Case Study #21: Purchases of Farm Equipment.

Part X: Methods of Long-Term Forecasting:.


58. Nonparametric Methods of Long-Term Forecasting:.

Survey Methods.

Analogy and Precursor Methods.

Scenario Analysis.

Delphi Analysis.

59. Statistical Methods of Determining Nonlinear Trends: Nonlinear Growth and Decline, Logistics, and Saturation Curves:.

Nonlinear Growth and Decline Curves.

Logistics Curves (S-Curves).

Saturation Curves.

Case Study #22: Growth in E-Commerce.

60. Predicting Trends Where Cyclical Influences are Important.

Case Study #23: Sales of Personal Computers.

61. Projecting Long-Run Trends in Real Growth.

Case Study #24: Projecting Long-Term Growth Rates in Japan and Korea.

62. Forecasting Very Long-Range Trends: Population and Natural Resource Trends:.

Predicting Long-Term Trends in Population Growth.

Predicting Long-Term Trends in Natural Resource Prices.

Part XI: Simultaneous Equation Models:.


63. Simultaneity Bias in a Single Equation.

64. Estimating Simultaneous Equation Models.

Case Study #25; Submodel for Prices and Wages.

65. Further Issues in Simultaneous Equation Model Forecasting.

Case Study #26: Simultaneous Determination of Inflation, Short-Term and Long-Term Interest Rates, and Stock Prices.

Case Study #27: Simultaneous Determination of Industrial Production, Producers Durable Equipment, Inventory Investment, and Imports.

66. Summary.

Part XII: Alternative Methods of Macroeconomic Forecasting:.


67. Structural vs VAR Models.

68. Solving Structural Macroeconomic Models:.

Outlining the Equilibrium Structure.

Newton-Raphson Method and the Gauss-Seidel Algorithm.

The Triangular Structure.

69. A Prototype Macroeconomic Model:.

Summary of Macroeconomic Model Equations.

Treatment of Trends and Autocorrelation.

70. Simulating the Model.

71. Preparing the Model for Forecasting:.

Forecasting With AR(1) Adjustments.

Forecasting With Constant Adjustments.

Comparison of Alternative Forecasts.

72. Using the Leading Indicators for Macroeconomic Forecasting.

73. Using Indexes of Consumer and Business Sentiment for Forecasting.