Autoregressive Model: Example

The Office Concept Corp. has acquired a number of

office units (in thousands of square feet) over the last 8
years. Develop the 2nd order Autoregressive models.
Year Units
98 4
99 3
00 2
01 3
02 2
03 2
04 4
05 6
Autoregressive Model: Example
Solution
Year Y
i
Y
i-1
Y
i-2

98 4 --- ---
99 3 4 ---
00 2 3 4
01 3 2 3
02 2 3 2
03 2 2 3
04 4 2 2
05 6 4 2
Coefficients
Intercept 3,5
X Variable 1 0,8125
X Variable 2 -0,9375
Excel Output
2 1
9375 , 0 8125 , 0 5 , 3

+ =
t t t
Y Y Y
Develop the 2nd order
table
Use Excel to run a
regression model
n = 6!!!
Autoregressive Model Example:
Forecasting
Use the 2nd order model to forecast number of
units for 2006:
625 , 4
4 9375 , 0 6 8125 , 0 5 , 3
9375 , 0 8125 , 0 5 , 3
2004 2005 2006
=
+ =
+ = Y Y Y
2 1
9375 , 0 8125 , 0 5 , 3

+ =
t t t
Y Y Y
Autoregressive Model Example:
Forecasting
Use the 2nd order model to forecast number of
units for 2008:
??
625 , 4 9375 , 0 ?? 8125 , 0 5 , 3
9375 , 0 8125 , 0 5 , 3
2006 2007 2008
=
+ =
+ = Y Y Y
CHAIN FORECAST
2 1
9375 , 0 8125 , 0 5 , 3

+ =
t t t
Y Y Y
Autoregressive Model Example:
Forecasting
If we want to forecast number of units for 2008,
first we need to forecast the number of units for
2007:
633 , 1
6 9375 , 0 6245 , 4 8125 , 0 5 , 3
9375 , 0 8125 , 0 5 , 3
2005 2006 2007
=
+ =
+ = Y Y Y
Autoregressive Model Example:
Forecasting
Now we can forecast number of units for 2008:
491 , 0
625 , 4 9375 , 0 633 , 1 8125 , 0 5 , 3
9375 , 0 8125 , 0 5 , 3
2006 2007 2008
=
+ =
+ = Y Y Y
2 1
9375 , 0 8125 , 0 5 , 3

+ =
t t t
Y Y Y
Autoregressive Model Example:
Mean Forecast Error
(
(
(

(
(
(

+ =
625 , 4
633 , 1
1
3125 , 0 0625 , 0 1
0625 , 0 3125 , 0 1
1 1 5 , 5
] 625 , 4 633 , 1 1 [ 1
e
S MFE
3318 , 2 45 , 2 49 , 1 = = MFE
Lets construct the forecast interval for 2008.
We need MFE:
Autoregressive Model Example:
Confidence Interval for Forecast
o
o o
= + < <

1 } {
, 2008 , 2008
2008
MFE t Y E MFE t Y P
k n Y k n
182 , 3
3 6 ; 05 , 0 ,
= =

t t
k n o
05 , 0 1 } 3318 , 2 182 , 3 491 , 0 3318 , 2 182 , 3 491 , 0 {
2008
= + < <
Y
E P
95 , 0 } 9108 , 7 9288 , 6 {
2008
= < <
Y
E P
Why?
B
1
or B
2
can be statistically insignificant
Determination coefficient too low
Improper autoregression rank (p2)