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Forecasting: Methods and Applications

CHAPTER in JOURNAL OF THE OPERATIONAL RESEARCH SOCIETY JANUARY 1984
Impact Factor: 0.95 DOI: 10.2307/2581936

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3 AUTHORS, INCLUDING:
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Rob J Hyndman

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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
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345

Book Reviews

matrixof the errorsis completelyknown,which

the variance-covariance
of
is nevertruein practice.It is possibleto give a moredetailedtreatment
asymptotictheoryand its usefulnesswithoutdivinginto measuretheory
conditions.But the book covers the centrallimittheorem
and regularity
(CLT) onlyin the Appendixof Chapter2. The proofof theCLT belongs
in the Appendix,but a discussionof it shouldbe moreprominent.
is in the motivationand
A second exampleof thebook's shortcomings
of the F statistic.The F statisticfirstappears in Chapter4,
presentation
whereit is introducedwithoutany motivation.Where does thatformula
come from?The answerarrivesin Chapter7 withinthecontextof Wald,
to theWald,
LM, and LR tests.The F statisticis revisitedas an alternative
LM, and LR tests,when in fact it is proportionalto the Wald test!No
of the F statisticappears again
mentionis ever made thatthe numerator
and again in the derivationof theWald, LM, and LR tests.Making these
to students.
forconveyingunderstanding
kindsof linksis important
a usefulrole foran introducThe bottomline is this.Thereis definitely
torygraduateeconometricstextthatis less technicaland moreaccessible
econometricsbackto studentswho do nothave extensiveundergraduate
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

Press.
Econometrics,Oxford,U.K.: OxfordUniversity
Greene,W. H. (1997), EconometricAnalysis(3rd ed.), Saddle River,NJ:
PrenticeHall.
(4thed.), New
J.,and DiNardo,J.(1997), EconometricMethocds
Johnston,
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.
College PubFrancis X. DIEBOLD. Cincinnati,OH: South-Western
lishing,1998. ISBN 0-538-86244-0.xiii + 392 pp. $76.95.
These two textbooksare aimed at identical audiences: (advanced)
or masters-levelbusiness studentswho have an interest
undergraduatein or will be usingforecastingtechniquesas partof theirjobs. The book
and Hyndman(MWH) is in its thirdedition,
by MakridakisWheelwright
whereasthatof Dielbold (DB) is a newcomer.
Both books reviewthe major highlightsof businessforecastingfrom
leave aside
a modelingand organizationalperspective.Both intentionally
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
materialthanMWH, such as explagreatly.DB has more introductory
nationsof means and standarddeviations.Both books presentsmoothing
else) MWH's explanations
methods,althoughhere (and mosteverywhere
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 withstandard forecastinggraphics(such as ACF plots),althoughDB goes further
(but has some problems).Neural nets are mentionedin both texts,with
The interesting
topic of ex-postforeMWH givingthe fullertreatment.
is also takenup by bothbooks,withsome uniquetwists
cast performance

given by each. Both textsdo a nice job of detailingthe organizational

and practicalitiesof businessforecasting(forone thing,telling
difficulties
thestudentto keep in mindthatthegoal of theforecastis to aid decision
models).Fimaking,notto overwhelmsomeonewithclevermathematical
nally,bothtextspresentnumerouspracticalhomeworkproblems,although
MWH has manymore.DB has an inordinatenumberof problemswhose
to grade).
onlytask is to "discuss" (makingthesedifficult
DB has additionalmaterialon forecast
To highlightthe differences,
graphics,and a moreextensivediscussionof unitrootsand Dickey-Fuller
tests.It also givesmorespace to ARCH and GARCH models,increasingly
toolsthatare onlymentionedin MWH. DB includesa fullerdisimportant
cussion of forecastaccuracymeasures,devotingan entirechapterto this
topic. (Afterall, if a forecastis to be used in a decisionit is a
important
This is whereDB is at its
good idea to knowhow well it has performed.)
best (no doubtbecause theauthorhas done originalresearchin thisarea).
MWH coversmoretopicsthanDB, suchas an extensiveoverviewof decompositionmethodsincludingthecensusX-12-ARIMA,Loess, and STL
techniques.It also providesa fullerexplanationof regressiontechniques,
econometricmodels, multipleregression,reincludingmulticollinearity,
and evennonparametric
gressionwithARIMA errors,dynamicregression,
tests.
and Portmanteau
local regression.It presentssectionson stationarity
analysis,state-spacemodels,
MWH also includessectionson intervention
autoregressive
nonlinearmodels (otherthanneuralnets),and multivariate
facedin long-range
models.A chapteris devotedto thespecial difficulties
includinga
forecasting,
and a nice chaptercoversjudgmentalforecasting,
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
to follow.For example,thereare a numberof
make the book difficult
typos,some of which could be misleadingto students.There are also
that should have been caught.For example,on page
misinterpretations
caused
25 adjustedR2 is said to compensateforthe possible overfitting
"(when)a varietyof righthand-sidevariablesare triedand the'bestmodel'
is selected."
Two stylisticcriticismsare the choice of fontused for the equations
fontis remmathematical
and theoveruseof footnotes.The eye-straining
programs.At
iniscentof thatfoundin some commercialword-processing
the given
times,it is confusingor impossibleto understandor interpret
equation.(On p. 22, forexample,thereadercannottell whethertheT - 1
belongs inside or outside of the radical sign in the definitionof sample
the flowof reading,and it is
standarddeviation.)The footnotesinterrupt
in themis in a note ratherthaninnot always clear whythe information
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
but
thecontextthatP is meantas a projectionoperator,
understand
through
Later,
theuninitiated
mighteasily confuseit witha probabilitystatement.
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
area of forecastinggraphics.The author'sinspidevotedto theimportant
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

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346

Journalof the AmericanStatisticalAssociation,March 1999

pictures.And severaltimes(e.g.,p.
explainedthroughwordsthanthrough
238), he plots a historicaltimeseriesand forecaston one figure,followed
immediately
by an absolutelyidenticalfigurebutwiththeinclusionof the
realizationsplottednextto the forecasts.These could have all been collapsed 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 provides data,butin theformof a web siteinsteadof a disk.There are some
minorflaws,butnothingthatwouldproveespeciallyproblematicfora student.Most mistakesare confinedto usingtermswithoutexplanation(e.g.,
althoughtheirpurpose
on p. 280, Cp and AIC are used withoutdefinition,
d
is clear, and on p. 210, = is includedwithno explanation).Something
thatdoes not actuallyqualifyas a problemis the chapteron long-range
insights,mainlysuggestingthat
forecasting.
MWH offerssome interesting
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) reviewwhicharguesthatmostbusiness
ing thebusinessof economicforecasting,
and economicforecastsare of littleor no value.
To continuethe discussionof long-rangeforecasts,MWH includes a
thatprovidesan exceland adjustments
chapteron judgmentalforecasting
forecasts.
lentreviewof all thatcan go wrongwhenhumanbiases influence
earlier,MWH includesan entirechapteron resultsfrom
And,as mentioned
Not much surprising
M competitions.
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 smoothis well aware
that,althoughtheresearchcommunity
ing). It is fascinating
of thesefacts,thishas notsloweddowntheeffort
expendedbuildingnewer
is imand morecomplexmodels withno real evidencethatperformance
proving.
MWH does notdevotemuchmaterialto unitroottests,whichis surprising consideringtheinordinateamountof timeand researchthateconometriciansdevoteto thistopic.MWH does a nicejob buildingand explaining
in simplelanguagethecompleteseasonal ARIMA model,a techniquethat
will surelyfindpracticaluse.
Overall,Forecasting:Methodsand Applicationsis a maturetextwith
techniques,containsa good
thoroughcoverageof essentialand important
mix of problemsets, and should serve well as a textbook.Elementsof
because of the new ideas in graphics
Forecastingis novel and interesting
and practicaladvice thatit presents.

mostbooks considerthese
havebegunto covertheseissues.Unfortunately,
As researchon unitroottestsand cointegration
reaches
issues onlybriefly.
maturity,
books devotedexclusivelyto these two topics are now being
published.TimeSeries, UnitRoots, atndCointegrationis one such book
thanunitroottests).
(withmoreemphasison cointegration
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
concentrateson vectorautoregrescase of iid errors,and cointegration
sions and integratedmovingaverages.However,the in-depthdiscussion
of a narrowlyfocusedclass of models makes it easier to understandthe
fundamentalsof these two topics. It also helps preparereadersfor the
studyof a widerclass of models,includingthose withdependenterrors.
and theoreticalaspects of
If one wantsa book withsound fundamentals
and unitroottests,thisis thatbook.
cointegration
to time series, estimation,and
Dhrymesbegins with an introduction
prediction.These topics are preliminaryto cointegrationand unit root
processes.Unitrootprocessesand relatedasymptoticpropertiesare then
bepresentedin a systematicmannerin Chapter3 by makinga distinction
tweentrueand operationalmodels,especiallyinvolvinga constantterm.
is thoroughfor the case of iid errors,some disAlthoughthe treatment
cussion about autocorrelatederrorswould be desirable.Various aspects
are discussed in the next threechapters,whichpresent
of cointegration
Constrained
rigorouscharacterization
and implicationsof cointegration.
vectorsbased on workof Ahn and Reinsel
estimationof thecointegrating
(1990) and Johansen(1988) is discussed,and a connectionto canonical
test for cointegration
variablesis made. A conformity
based on an unProbabilitytopics such as
constrainedestimatoris discussedextensively.
and invarianceprinciplesare esBrownianmotion,stochasticintegration,
and unit root processes. The last
sential to understanding
cointegration
threechaptersprovidea good overviewof these topics and containmaand unitroot processes. These chapters
terialpertinentto cointegration
come in handyreadingChapters3-6.
It is worthcomparingDhrymes'book to the recentbooks by Hamilton(1994) and Reinsel (1997), whichalso covercointegration
extensively.
Hamiltonprovidesa "grocerystore" of time series analysis,coveringa
vast rangeof topicswithbreadth,whereasReinsel centerson analysisof
comtimeseries.Tine Series, UnitRoots,and Cointegration
multivariate
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
This book
a primarytextbookin a courseon unitrootsand cointegration.
shouldbe includedin a requiredreadinglist for those who studymultivariatetimeseriesor econometrics.
Sung K. AHN
State University
Washington

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

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