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Forecasting: Methods and Applications

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Forecasting: Methods and Applications by Spyros Makridakis; Steven C. Wheelwright; Rob J.
Hyndman; Elements of Forecasting by Francis X. Diebold
Review by: William M. Briggs
Journal of the American Statistical Association, Vol. 94, No. 445 (Mar., 1999), pp. 345-346
Published by: Taylor & Francis, Ltd. on behalf of the American Statistical Association
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Book Reviews
the variance-covariance matrixof the errorsis completelyknown,which
is nevertruein practice.It is possibleto give a moredetailedtreatment of
asymptotictheoryand its usefulnesswithoutdivinginto measuretheory
and regularity conditions.But the book covers the centrallimittheorem
(CLT) onlyin the Appendixof Chapter2. The proofof theCLT belongs
in the Appendix,but a discussionof it shouldbe moreprominent.
A second exampleof thebook's shortcomings is in the motivationand
presentation of the F statistic.The F statisticfirstappears in Chapter4,
whereit is introducedwithoutany motivation.Where does thatformula
come from?The answerarrivesin Chapter7 withinthecontextof Wald,
LM, and LR tests.The F statisticis revisitedas an alternative to theWald,
LM, and LR tests,when in fact it is proportionalto the Wald test!No
mentionis ever made thatthe numerator of the F statisticappears again
and again in the derivationof theWald, LM, and LR tests.Making these
kindsof linksis important forconveyingunderstanding to students.
The bottomline is this.Thereis definitely a usefulrole foran introduc-
torygraduateeconometricstextthatis less technicaland moreaccessible
to studentswho do nothave extensiveundergraduate econometricsback-
ground.It is essentialthatsuch a textavoid being purelyempiricaland
cookbook in style.Econometricsrepresentsa step in thatdirection,but
further stepsare needed,includingsome morecarefulediting.
TimothyJ.VOGELSANG
Cornell University
REFERENCES
Davidson,R., and MacKinnon,J. G. (1993), Estimationand Inferencein
Econometrics,Oxford,U.K.: OxfordUniversity Press.
Greene,W. H. (1997), EconometricAnalysis(3rd ed.), Saddle River,NJ:
PrenticeHall.
J.,and DiNardo,J.(1997), EconometricMethocds
Johnston, (4thed.), New
York:McGraw-Hill.
Forecasting: Methods and Applications (3rd Ed.).
Spyros MAKRIDAKIS, Steven C. WHEELWRIGHT,and Rob J.
HYNDMAN. New York: Wiley, 1998. ISBN 0-471-53233-9. xiv +
642 pp. $87.95.
Elements of Forecasting.
Francis X. DIEBOLD. Cincinnati,OH: South-Western College Pub-
lishing,1998. ISBN 0-538-86244-0.xiii + 392 pp. $76.95.
These two textbooksare aimed at identical audiences: (advanced)
undergraduate- or masters-levelbusiness studentswho have an interest
in or will be usingforecastingtechniquesas partof theirjobs. The book
by MakridakisWheelwright and Hyndman(MWH) is in its thirdedition,
whereasthatof Dielbold (DB) is a newcomer.
Both books reviewthe major highlightsof businessforecastingfrom
a modelingand organizationalperspective.Both intentionally leave aside
theoreticaldevelopmentsand concentrateon practicalaspects. There is
a greatdeal of overlapbetweenthe two books and one should consider
buyingone or theother,butnotboth.Here I outlinethematerialcovered
in bothbooks first,thenprovideby individualcritiquesand a discussion
of unique materialpresentedin each.
Both books assume verylittlebackgroundknowledgeof the student.
However,at least one priorcourse in statisticswould benefitthe student
greatly.DB has more introductory materialthanMWH, such as expla-
nationsof means and standarddeviations.Both books presentsmoothing
methods,althoughhere (and mosteverywhere else) MWH's explanations
are of greaterdepthand clarity.Regressiontechniquesforforecastingare
covered,as are model and variableselectionand testing.Of course,both
books cover ARIMA modelingin some detail. DB builds up to a full
ARIMA model more slowly,takingseveral chapters.MWH succinctly
coversARIMA and seasonal ARIMA. Both do an adequatejob withstan-
dard forecastinggraphics(such as ACF plots),althoughDB goes further
(but has some problems).Neural nets are mentionedin both texts,with
MWH givingthe fullertreatment. The interestingtopic of ex-postfore-
cast performance is also takenup by bothbooks,withsome uniquetwists
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All use subject to JSTOR Terms and Conditions
345
given by each. Both textsdo a nice job of detailingthe organizational
difficulties and practicalitiesof businessforecasting(forone thing,telling
thestudentto keep in mindthatthegoal of theforecastis to aid decision
making,notto overwhelmsomeonewithclevermathematical models).Fi-
nally,bothtextspresentnumerouspracticalhomeworkproblems,although
MWH has manymore.DB has an inordinatenumberof problemswhose
onlytask is to "discuss" (makingthesedifficult to grade).
To highlightthe differences, DB has additionalmaterialon forecast
graphics,and a moreextensivediscussionof unitrootsand Dickey-Fuller
tests.It also givesmorespace to ARCH and GARCH models,increasingly
important toolsthatare onlymentionedin MWH. DB includesa fullerdis-
cussion of forecastaccuracymeasures,devotingan entirechapterto this
important topic. (Afterall, if a forecastis to be used in a decisionit is a
good idea to knowhow well it has performed.) This is whereDB is at its
best (no doubtbecause theauthorhas done originalresearchin thisarea).
MWH coversmoretopicsthanDB, suchas an extensiveoverviewof de-
compositionmethodsincludingthecensusX-12-ARIMA,Loess, and STL
techniques.It also providesa fullerexplanationof regressiontechniques,
includingmulticollinearity, econometricmodels, multipleregression,re-
gressionwithARIMA errors,dynamicregression, and evennonparametric
local regression.It presentssectionson stationarity and Portmanteau tests.
MWH also includessectionson intervention analysis,state-spacemodels,
nonlinearmodels (otherthanneuralnets),and multivariate autoregressive
models.A chapteris devotedto thespecial difficulties facedin long-range
forecasting, and a nice chaptercoversjudgmentalforecasting, includinga
discussionof how to combinejudgmentaland statisticalforecasts.Finally,
an entirechapteris devotedto theresultsfromtheM competitions.(This
is not surprising, since Makridakisarrangedthese;for those unawareof
thesecompetitions, theywere an organizedeffortto investigatehow well
varioustimeseries methodsperformin practice.)
DB has manyof the typicalflawsof a firstedition,whichsometimes
make the book difficult to follow.For example,thereare a numberof
typos,some of which could be misleadingto students.There are also
misinterpretations that should have been caught.For example,on page
25 adjustedR2 is said to compensateforthe possible overfitting caused
"(when)a varietyof righthand-sidevariablesare triedand the'bestmodel'
is selected."
Two stylisticcriticismsare the choice of fontused for the equations
and theoveruseof footnotes.The eye-straining mathematical fontis rem-
iniscentof thatfoundin some commercialword-processing programs.At
times,it is confusingor impossibleto understandor interpret the given
equation.(On p. 22, forexample,thereadercannottell whethertheT - 1
belongs inside or outside of the radical sign in the definitionof sample
standarddeviation.)The footnotesinterrupt the flowof reading,and it is
not always clear whythe information in themis in a note ratherthanin-
cluded in themaintext.Moreover,theauthoroftenrepeatshimselfin the
footnotes(and in thetext),givingthesensethatthebook was notsubjected
to close editing.The overallreadabilityand organizationof the textgive
the same feeling.
A majorcriticismis thatDB oftenintroducestermsand phraseswithout
definition or explanation.On page 163, thereaderis told thatall rootsof
a certainpolynomialshouldbe "inside the unitcircle."The readernever
learns what a unit circle is and how a root mightlie there(recall that
the intendedaudience for thisbook is businessstudents).On page 197,
the operatorP is used withoutexplanation.The experiencedreaderwill
understand through thecontextthatP is meantas a projectionoperator, but
theuninitiated mighteasily confuseit witha probabilitystatement. Later,
on page 296, anotheruse forP is given(to indicatea polynomial).Finally,
on page 331, in the contextof introducingneural nets,the "squashing
function"(normallycalled theactivationfunction)is introducedbutnever
explained(neitherexplainedis thenew and odd terminology).
In its favor,DB is the firstbook I have seen with an entirechapter
devotedto theimportant area of forecastinggraphics.The author'sinspi-
rationis drawnmainlyfromtheworksby Tufte.DB also bringsin theuse
of cumsumchartsforregressionmodel parameters.However,one is left
wonderingwhytheauthordid nottakehis own advice,because thebook's
latterhalfcontainsmorethana dozen examplesof less thaninspirational
graphics.Justto cite one example,on page 138 the readeris treatedto
the ACF and PACF of a whitenoise process (to imaginewhatthislooks
like,draw a graphwithnothingon it). This phenomenacould have better
346 Journalof the AmericanStatisticalAssociation,March 1999

explainedthroughwordsthanthrough pictures.And severaltimes(e.g.,p. havebegunto covertheseissues.Unfortunately, mostbooks considerthese

238), he plots a historicaltimeseriesand forecaston one figure,followed
immediately by an absolutelyidenticalfigurebutwiththeinclusionof the
realizationsplottednextto the forecasts.These could have all been col-
lapsed to one figure.DB does includea disk containingall of thedata for
the examplesin thebook.
MWH is a comprehensiveoverviewof the fieldof practicalbusiness
forecasting.As this book is in its thirdedition,most typos have been
eliminated,and theflowis well designedfora textbook.Like DB, it pro-
vides data,butin theformof a web siteinsteadof a disk.There are some
minorflaws,butnothingthatwouldproveespeciallyproblematicfora stu-
dent.Most mistakesare confinedto usingtermswithoutexplanation(e.g.,
on p. 280, Cp and AIC are used withoutdefinition, althoughtheirpurpose
d of a narrowlyfocusedclass of models makes it easier to understandthe
is clear, and on p. 210, = is includedwithno explanation).Something
thatdoes not actuallyqualifyas a problemis the chapteron long-range
forecasting. MWH offerssome interesting insights,mainlysuggestingthat
forthelong
the"usual" methodologiesdo notworkwell whenforecasting
term.It is interesting thatlong-rangetime series data are just data, so
thatthestandardmethodologiesshouldwork.(Afterall, an ARMA model
cannot"sense" thetimeperiodsinvolved.)Why theydo not,of course,is
thatthestandardassumptions(like stationarity) are no longervalid forthe
longterm.This shouldemphasizeto thestudentthatall timeseriesmodels
are only approximations and not explanatorymodels. It shouldalso give
the studentpause when applyingshort-term models,suggestingthatthe
resultsare notnecessarilyto be trusted.Perhapslost on thestudentis that
most long-rangeforecastsare pure speculation(includingsome curious
forecastsprovidedby MWH itselfon pp. 474-476). Anyonedoubtingthis
shouldtake noteof WilliamSherden'snew book (Sherden1998) review-
ing thebusinessof economicforecasting, whicharguesthatmostbusiness
and economicforecastsare of littleor no value.
To continuethe discussionof long-rangeforecasts,MWH includes a
chapteron judgmentalforecasting and adjustments thatprovidesan excel-
lentreviewof all thatcan go wrongwhenhumanbiases influence forecasts.
And,as mentioned earlier,MWH includesan entirechapteron resultsfrom
M competitions. Not much surprising here,but thisis a greatchapterto
enable a studentto put all previouslylearnedtheoryintoperspective.The
studentmay be shocked to learn thatthe more complex methods(like
ARIMA models) are oftenoutperformed by simplemodels (like smooth-
ing). It is fascinatingthat,althoughtheresearchcommunity is well aware
of thesefacts,thishas notsloweddowntheeffort expendedbuildingnewer
and morecomplexmodels withno real evidencethatperformance is im-
proving.
MWH does notdevotemuchmaterialto unitroottests,whichis surpris-
ing consideringtheinordinateamountof timeand researchthateconome-
triciansdevoteto thistopic.MWH does a nicejob buildingand explaining
in simplelanguagethecompleteseasonal ARIMA model,a techniquethat
will surelyfindpracticaluse.
Overall,Forecasting:Methodsand Applicationsis a maturetextwith
thoroughcoverageof essentialand important techniques,containsa good
mix of problemsets, and should serve well as a textbook.Elementsof
Forecastingis novel and interesting because of the new ideas in graphics
and practicaladvice thatit presents.
issues onlybriefly.As researchon unitroottestsand cointegration reaches
maturity, books devotedexclusivelyto these two topics are now being
published.TimeSeries, UnitRoots, atndCointegrationis one such book
(withmoreemphasison cointegration thanunitroottests).
Otherbooks cover unitroots and cointegration extensively(Hamilton
1994; Reinsel 1997). One of the distinctivefeaturesof Dhrymes' book
is its emphasison theoreticaldevelopmentand probabilisticfoundations.
In its theoreticaldevelopment,Dhrymesfocuses on a narrowerclass of
nonstationary models. For example,unitroot testsfocus mainlyon the
case of iid errors,and cointegration concentrateson vectorautoregres-
sions and integratedmovingaverages.However,the in-depthdiscussion
fundamentalsof these two topics. It also helps preparereadersfor the
studyof a widerclass of models,includingthose withdependenterrors.
If one wantsa book withsound fundamentals and theoreticalaspects of
cointegration and unitroottests,thisis thatbook.
Dhrymesbegins with an introduction to time series, estimation,and
prediction.These topics are preliminaryto cointegrationand unit root
processes.Unitrootprocessesand relatedasymptoticpropertiesare then
presentedin a systematicmannerin Chapter3 by makinga distinction be-
tweentrueand operationalmodels,especiallyinvolvinga constantterm.
Althoughthe treatment is thoroughfor the case of iid errors,some dis-
cussion about autocorrelatederrorswould be desirable.Various aspects
of cointegration are discussed in the next threechapters,whichpresent
rigorouscharacterization and implicationsof cointegration. Constrained
estimationof thecointegrating vectorsbased on workof Ahn and Reinsel
(1990) and Johansen(1988) is discussed,and a connectionto canonical
variablesis made. A conformity test for cointegrationbased on an un-
constrainedestimatoris discussedextensively. Probabilitytopics such as
Brownianmotion,stochasticintegration, and invarianceprinciplesare es-
sential to understanding cointegration and unit root processes. The last
threechaptersprovidea good overviewof these topics and containma-
terialpertinentto cointegration and unitroot processes. These chapters
come in handyreadingChapters3-6.
It is worthcomparingDhrymes'book to the recentbooks by Hamil-
ton(1994) and Reinsel (1997), whichalso covercointegration extensively.
Hamiltonprovidesa "grocerystore" of time series analysis,coveringa
vast rangeof topicswithbreadth,whereasReinsel centerson analysisof
multivariate timeseries.Tine Series, UnitRoots,and Cointegration com-
plementsthese two books, and vice versa. As notedin the Preface,this
book can be used as a secondarytextbookor a referencein an advanced
graduate-leveltimeseries or econometricscourse. It can also be used as
a primarytextbookin a courseon unitrootsand cointegration. This book
shouldbe includedin a requiredreadinglist for those who studymulti-
variatetimeseriesor econometrics.
Sung K. AHN
State University
Washington

WilliamM. BRIGGS REFERENCES

Cornell University Ahn, S. K., and Reinsel,G. C. (1990), "Estimationfor PartiallyNonsta-
tionaryMultivariateAutoregressive Models," Journalof theAmerican
REFERENCE StatisticalAssociation,85, 813-823.
of theEstimatesfor
Dickey,D. A., and Fuller,W. A. (1979), "Distribution
Sherden,W. A. (1998), The FortuneSellers: The Big Business of Buying
Autoregressive Time Series Witha UnitRoot,"JournaloftheAmerican
and SellingPredictions,New York:Wiley.
StatisticalAssociation,74, 427-431.
(1981), "LikelihoodRatio StatisticsforAutoregressive
Time Series
Witha UnitRoot,"Econometrica,49, 1057-1072.
Engle,R. F., and Granger,C. W. J. (1987), "Cointegrationand ErrorCor-
Time Series, Unit Roots, and Cointegration. rection:Representation, Estimation,and Testing,"Economnetrica, 55,
PhoebusDHRYMES. San Diego: Academic Press, 1997. ISBN 0-12- 251-276.
214695-6. xiv + 524 pp. $89.95. Hamilton,J. D. (1994), Time Series Analysis,Princeton,NJ: Princeton
UniversityPress.
Unit root tests and cointegrationhave been two of the most heavily Johansen,5. (1988), "StatisticalAnalysisof Cointegration Vectors,"Jour-
researchedtopicsin timeseriessincetheworkof Dickey and Fuller(1979, nal ofEconomicDynamicsand Control,12,231-254.
1981) and Engle and Granger(1987). Because of theimportanceof these Reinsel, G. C. (1997),ElementsofMultivariateTimeSeriesAnalysis,New
topics in theoryand practice,recenttimeseries and econometricsbooks York: Springer-Verlag.

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