ECONOMICS FORECAST

This paper requires content knowledge in Chapters 3 – 5. Please listen to the lectures and read your chapters before starting your work.

You need to choose at least 2 (preferable 3) macroeconomic variables that you think will work well with your revenue variable.

Please write a narrative for PP2 and do not use numbers.

1. Plot your X variables (Stats>Time Series>TS plot) and describe what you see. For each X variable, explain if it is stationary vs nonstationary, multiplicative vs. additive, seasonal or not, trending vs. not, if trending, is the trend linear vs non-linear?

2. Plot ACF of your X variables and identify trend/seasonality if any. Make sure to do your hypothesis testing for significance of autocorrelation. Do you have trend and/or seasonality?

3. For each X variable, run the Naïve method. Start making your table and making note of the error summaries.

4. For each X variable, run all three smoothing methods and enter error summary to your table.

5. Go to Time Series>Trend Analysis and try all 4 trend models. Pick the best one and tell me why it is the best one.

6. Go to Time Series>Decomposition, run both “SEASONALY ONLY” and “SEASONAL + TREND”. Also run both the additive and multiplicative models to confirm what you find in question 1. Which one is the best model, why?

7. Make a table that summarizes the errors (MSD, MAD, or MAPE) of each model for each of the X variables. Below is a partial table to give you an idea. Once you complete your table, pick the best overall model for each X variable. You will have as many rows in your table as methods you are using. See the partial incomplete table** example below.

8. Using the best method for each X variable, generate 10 out-of-sample forecasts.

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