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Assignment
ECON 2024 Please work in groups of 3 and hand in your solution by 6 pm, April 12th. The object of forecasting is to produce a method to predict future values of one or more series. Usually we also wish to have some measure of the uncertainty of the forecast, and this is expressed in terms of a prediction interval(s), e.g., you may give a 70% , 80% and 95% PI’s. There is often an underlying model behind the forecast method, such that the forecast method is optimal for that model. The prediction intervals are often also based on this model. In modelling, and in particular forecasting, you will want to choose be- tween models to find the model that predicts best, or which model makes better intuitive sense when two models are nearly equally good at prediction. Note that you should avoid assessing how well a model predicts by seeing how close the fitted values are to the observed yt. That is, choosing a model by doing in-sample prediction. This also applies to choosing between predictive models based on in-sample prediction. For that you need a validation sample; or you do time series cross-validation; or cross-validation when appropriate. For your analysis, please pick a time series that exhibits both trend and seasonality and develop a forecasting model, where the final model you present should aim to satisfy the various criteria for a good model specified in the book and the lecture notes. In your work, you should: (a) Develop a forecasting model based on exponential smoothing. That may mean considering several exponential smoothing models and then 1 choosing the best one using one or more criteria. (b) Repeat for a forecasting model based on an ARIMA approach. (c) Compare your preferred exponential smoothing model with your pre- ferred ARIMA model using time series cross-validation. By March 18 please send Yangui and I a) the names of the people in your group; c) the role of each member of the group; c) a description of the time series chosen. If too many groups choose a certain time series, we may direct you to choose a different one. In your submission, please also report the role played by each person in the group. The report should consist of a summary of what you achieved which is half a page to a page, the body of the report which contains the main result and recommendations of the study, and is 3 to 5 pages in length. You can also have a technical appendix with some extra maths and plots, but make sure that the report (excluding the appendix) is self sufficient by itself.