Forecasting_Lecture_1-Introduction to Forecasting and Simulation final.pptx - AGEC 622 This course prepares you for a job in business Have you ever made

Forecasting_Lecture_1-Introduction to Forecasting and Simulation final.pptx

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AGEC 622 This course prepares you for a job in business Have you ever made a price forecast? How much confidence did you place on your forecast? Was it correct? We will learn how to make forecasts with confidence intervals How to use risky forecasts in decision models for business 1
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Forecasting and Simulation Forecasters give a point estimate of a variable Simulation preferred tool for risk analysis Our goal is to merge these two fields of research and apply them to business decisions We will use probabilistic forecasting and risk modeling for business decision analysis 2
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Materials for this Lecture Read Section 13 in Chapter 16 of Simulation book Read Chapters 1 and 2 Read first half of Chapter 15 on trend forecasting Forecasting_Lecture 1 final.xls Read “Appendix A – Using Excel” Before each class review materials for that class Overheads for the lecture Readings in book Excel spreadsheet for the days lecture 3
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Simulate a Forecast Two components to a probabilistic forecast Deterministic component gives a point forecast Ŷ = a + b 1 X + b 2 Z Stochastic component is ẽ and is used as: Ỹ = Ŷ + ẽ Which leads to the complete probabilistic forecast model Ỹ = a + b 1 X + b 2 Z + ẽ ẽ makes the deterministic forecast a probabilistic forecast 9.00 11.00 13.00 15.00 17.00 19.00 21.00 23.00 25.00 27.00 Probabilistic Forecast 4
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Summarize Probabilistic Forecasting Simulation provides an easy method for incorporating probabilities and confidence intervals into forecasts Steps for probabilistic forecasting 1. Estimate best econometric model to explain trend, seasonal, cyclical, structural variability to get Ŷ T+i 2. Residuals (ê) are unexplained variability or risk; an easy way is to assume ê is distributed normal 3. Simulate risk as = NORM(0,σ e ) 4. Probabilistic forecast is T = Ŷ T+i + ẽ 5
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Introduction to Simulation The future is risky but it is where we make profits and lose money Without risk, little or no chance of profit Simulation is the preferred tool for analyzing the effects of risk for a business decision Analyze business/investment alternatives Analyze alternative management strategies Compare and rank risky decisions Goal as risk analysts is to “help” decision makers by providing more information than a point forecast 6
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Purpose of Simulation … to estimate distributions that we can not observe and apply them to
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