Principles of Business Forecasting 1st

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 Chapter 10 ● Advanced Methods of Forecasting
Exercises 10.7, 10.9, 10.10, and 10.11 Solutions

Authors’ note (Sept. 2012): The solutions to 10.7, 10.9 and 10.11 are at best incomplete!
10.7 Using the data set Gasprices_full.xlsx,
a. Test whether Crude, CPI, and Unemployment are stationary variables.
b. Develop a regression model for Unleaded, using the methods of Chapter 9.
c. Develop a three-variable VAR model that includes the price of Unleaded. In so doing, include only
those variables you expect to have an economic impact on the unleaded price. Use a maximum of two
lags.
d. Examine whether there is evidence for including lags longer than two in your model.
e. Evaluate the forecasting performance of your chosen model.
f. Develop a model in differences (for any of the nonstationary variables). Is this model a "better" model
than the model developed in levels in parts (b) and (c)? Explain. Does the forecasting performance of
the model improve on that of any of the earlier models?

The analysis we carry out are all much, much easier in proper econometric software. In the text we have
used either EViews7 or PCGive.`
10.9 Durkin, Ord, and Walker (2010) examined the growth of credit markets in the United States since 1946.
The data file Credit.xlsx contains annual values for real mortgage credit (RMC), real consumer credit
(RCC), and real disposable personal income (RDPI) for the period 1946-2006. All the observations are
measured in billions of dol lars, after adjustment by the Consumer Price Index (CPI). Develop a VAR
model for these data for the period 1946-2003, and then forecast the last three years, 2004-2006. Examine
the relative advantages of a logarithmic transform and the use of differences.
10.10 Using the data set Gasprices_1.xlsx, but setting aside the data for 2006 through 2010, develop an
unrestricted VAR model, an ECM, and a model in stationary variables. Use appropriate error statistics to
examine the residuals and test their respective forecasting performances.
a. Do the residuals of the various models suggest any inadequacies in the model?
b. If you now consider the more recent data, from 2006 to 2010, does your chosen model show any
instability in its performance?
c. If you also bring into consideration the performance of the models over the years 2009-2010, which
model would you use for forecasting for the period 2011-2012? Explain your reasons.

WE use PcGive. Our focus is on explaining unleaded prices and our first model has included Unleaded,
CRUDE, CPI and Unemployment, with 3 lags. We will also take logs based on the analysis we carried out
in chapter 10. Use of PDI does not help the modelling although since it affects CPI it might prove of overall
benefits (some of the other factors might – perhaps we should extend the data base to include World Trade).
The forecasts for the last 5 years and the residuals are shown below.
A model with Unemployment and PDI was considered. From 2008 unemployment was persistently higher as
was PDI. The model was clearly inadequate.
Some programs including PCGive carry out automatic model selection. Here we summarize the results for
Log(Unleaded). Automatic model selection with insignificant lags excluded gives the following equation
for LogUnleaded

Graphs of the residuals and the forecasts compared to the actual are provided as shown:
Ord/Fildes Principles of Business Forecasting 1e Chapter 10 Exercises 10.7, 10.9, 10.10, 10.11 Solutions 2

© Cengage Learning 2013

All the variables show 2008-9 to generate large negative residuals caused by the major recession.

Coefficient Std.Error t-value t-prob

LUnleaded_1 1.29990 0.1515 8.58 0.0000
LUnleaded_2 -0.889233 0.1619 -5.49 0.0000
LUnleaded_3 0.213719 0.09172 2.33 0.0216
LCrude_1 0.216071 0.04265 5.07 0.0000
LCPI_1 -9.19292 3.045 -3.02 0.0032
LCPI_2 8.83651 2.959 2.99 0.0035
LPDI_1 0.242545 0.2014 1.20 0.2310
Constant U -0.913144 0.8210 -1.11 0.2685

sigma = 0.0423565 RSS = 0.1955538353

The in-sample residual tests suggest some discrepancies as shown below:

1-step (ex post) forecast analysis 2006-01-15 - 2010-12-15
Parameter constancy forecast tests:
using Omega Chi^2(240)= 484.69 [0.0000]** F(240,109)= 2.0196 [0.0000]**
using V[e] Chi^2(240)= 367.04 [0.0000]** F(240,109)= 1.5293 [0.0062]**
using V[E] Chi^2(240)= 411.19 [0.0000]** F(240,109)= 1.7133 [0.0008]**

Single-equation diagnostics using reduced-form residuals:

LUleaded : AR 1-2 test: F(2,107) = 1.1161 [0.3313]
LUleaded : ARCH 1-1 test: F(1,115) = 0.10145 [0.7507]
LUleaded : Normality test: Chi^2(2) = 18.077 [0.0001]**
LUleaded : Hetero test: F(14,102) = 1.9298 [0.0314]*
LUleaded : Hetero-X test: F(35,81) = 1.1479 [0.3008]
LCrude : AR 1-2 test: F(2,107) = 0.97313 [0.3812]
LCrude : ARCH 1-1 test: F(1,115) = 0.17761 [0.6742]
LCrude : Normality test: Chi^2(2) = 2.8983 [0.2348]
LCrude : Hetero test: F(14,102) = 0.94443 [0.5149]
LCrude : Hetero-X test: F(35,81) = 0.89920 [0.6290]

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
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Ord/Fildes Principles of Business Forecasting 1e Chapter 10 Exercises 10.7, 10.9, 10.10, 10.11 Solutions 3

LCPI : AR 1-2 test: F(2,107) = 1.3463 [0.2646]

LCPI : ARCH 1-1 test: F(1,115) =0.0063127 [0.9368]
LCPI : Normality test: Chi^2(2) = 64.999 [0.0000]**
LCPI : Hetero test: F(14,102) = 1.8542 [0.0405]*
LCPI : Hetero-X test: F(35,81) = 1.2062 [0.2426]
LPDI : AR 1-2 test: F(2,107) = 4.0733 [0.0197]*
LPDI : ARCH 1-1 test: F(1,115) = 35.676 [0.0000]**
LPDI : Normality test: Chi^2(2) = 402.21 [0.0000]**
LPDI : Hetero test: F(14,102) = 3.1519 [0.0004]**
LPDI : Hetero-X test: F(35,81) = 2.9660 [0.0000]**

Vector AR 1-2 test: F(32,363) = 1.4495 [0.0583]

Vector Normality test: Chi^2(8) = 443.90 [0.0000]**
Vector ZHetero test: F(56,387) = 1.6613 [0.0033]**
Vector ZHetero-X test: F(140,313)= 1.4242 [0.0058]**
Vector RESET23 test: F(32,363) = 2.9373 [0.0000]**
As noted the stability tests show the problem.

However, we’ve fitted an unconstained model. Is that the appropriate strategy? Checking using the ADF
(Dickey-Fuller) test we can establish the variables are not stationary – and a visual check and consideration
as to what they measure also confirms that conclusion.
We now fit the model to the log differenced data.
URF equation for: DlnUnlead
Coefficient Std.Error t-value t-prob
DlnUnlead_1 0.555595 0.1356 4.10 0.0001
DlnUnlead_2 -0.442501 0.1021 -4.34 0.0000
DlnCrude_1 0.194860 0.06470 3.01 0.0032
DlnCrude_3 0.161456 0.06010 2.69 0.0083
DCPI_1 -8.36960 2.912 -2.87 0.0049
Constant U 0.0191948 0.006881 2.79 0.0062

sigma = 0.0435472 RSS = 0.2085990505

The constraint, despite making sense produces a marginally higher sigma. We should also check the accuracy of
the forecasts. We examine the 1-step ahead forecasts from the unconstrained model, the differenced model
noting that the errors are dominated by the 2008-9 errors so medians are used. We should consider
calculating rolling forecast for longer horizons, e.g. 12 months.
Differenced Levels
Model Model
Mean 0.056126 0.052908
Median 0.035411 0.039347
The differenced model appears to be more robust but there’s not much in it.
Error corrections models were considered but without success in identifying a set of meaningful restrictions.
Fitting a model to the full data set gives the following graphs.

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Ord/Fildes Principles of Business Forecasting 1e Chapter 10 Exercises 10.7, 10.9, 10.10, 10.11 Solutions 4

© Cengage Learning 2013

As before there is some limited evidence of outliers in 2009. The equation for: LUleaded
Coefficient Std.Error t-value t-prob
LUleaded_1 1.21294 0.1339 9.06 0.0000
LUleaded_2 -0.713818 0.1424 -5.01 0.0000
LUleaded_3 0.0696510 0.07329 0.950 0.3433
LCrude_1 0.241842 0.04189 5.77 0.0000
LCPI_1 -3.94918 2.479 -1.59 0.1131
LCPI_2 3.28624 2.387 1.38 0.1704
LPDI_1 0.438498 0.1657 2.65 0.0089
Constant U -1.17888 0.5739 -2.05 0.0415

The coefficients are somewhat similar apart from CPI. Note that both model estimations suggest that CPI should
be included in differenced form. It is of course a non-stationary variable as the graph makes clear.
© Using the most recent data, we first need to add in some dummy variables for the unexpected large impact of
the recession.
10.11* Using the data set Exchange_rates.xlsx, covering data on the $US-Euro and $US-£Sterling exchange
rates from June 13, 1991, to June 13, 2011,
a. Test the stationarity of each series
i. with the subset with data from October 13, 1997, to June 13, 2002.
ii. with the full data set.
b. For each time series, develop an ARIMA model that produces one-step-ahead daily forecasts. Then do
the same for monthly average exchange rates.
c. Are the two series cointegrated? Consider both the full and the shorter data sets.
d. Is there any evidence of structural breaks in the full data series?

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Ord/Fildes Principles of Business Forecasting 1e Chapter 10 Exercises 10.7, 10.9, 10.10, 10.11 Solutions 5

e. Carry out a literature review of the comparative accuracy of alternative methods of exchange rate
forecasting. Do you find any evidence that any of the methods you have discovered have proved
successful beyond the random-walk naïve alternative?

We first graph the two series.

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The Project Gutenberg eBook of Julia Cary
and her kitten
This ebook is for the use of anyone anywhere in the United States
and most other parts of the world at no cost and with almost no
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under the terms of the Project Gutenberg License included with this
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you are located before using this eBook.

Title: Julia Cary and her kitten

Author: M. E. Miller

Release date: September 17, 2023 [eBook #71668]

Language: English

Original publication: New York: American Tract Society, 1873

Credits: Bob Taylor, Charlene Taylor and the Online Distributed

Proofreading Team at https://www.pgdp.net (This file was
produced from images generously made available by The
Internet Archive/American Libraries.)

*** START OF THE PROJECT GUTENBERG EBOOK JULIA CARY

AND HER KITTEN ***
 JULIA CARY
AND
HER KITTEN.

BY MRS. M. E. MILLER.

AMERICAN TRACT SOCIETY,

150 NASSAU STREET, NEW YORK.
 Entered, according to Act of Congress, in the year 1873, by the American
Tract Society, in the Office of the Librarian of Congress, at Washington.
JULIA CARY
AND

HER KITTEN.
 CHAPTER I.
A SAIL.

A fine large steamboat was sailing up the Hudson river one

summer morning.
Up and down its broad decks and pretty saloons skipped lively
little Julia Cary.
“Don’t ask me to keep still, Ellen; I can’t, I am so happy,” she said.
Ellen was her nurse, who had taken loving care of Julia since she
was a baby.
She kindly went to the side of the boat, whenever it was to land, so
that the little girl might see a stout man ring a big bell, and other men
throw ropes to men on shore. These ran and threw the ropes over
huge posts, and so held the boat fast till people went ashore. Then
other people came on the boat; then the ropes were drawn back,
and the boat started on again.
But Julia liked better still to wander about, holding her father’s
hand. He could answer all her questions about the lovely shores they
sailed between. He told the names of the villages they passed, and
showed her the busy machinery that sent the boat swiftly along, far
away from the hot city.
“Papa,” said Julia, “are you poor?”
“In money, child? No, no; I have more than you and I will spend.”
“And you are good, papa, and are not sick. What did that lady
mean when she said, ‘Poor Julia! poor papa!’”
Mr. Cary walked quickly on, leading Julia by the hand.
Down stairs, where trunks and boxes of all kinds were piled, on
their own poor luggage sat a family of German emigrants.
 You would quickly call them poor. Their clothes were coarse. They
were eating black bread, because they could not pay for a good
dinner such as Julia and her father had.
Two little girls and one stout boy laughed and jabbered their queer
talk with their mother and father. The mother held a baby on her
knee—an odd-looking fat baby, with a funny cap on its head.
Mr. Cary sat down on a trunk, at a little distance from them, and
lifting Julia upon his knee, he said,
“My darling will learn that she and I must be, in one way, poor as
long as we live. What has that little trot-foot got that money cannot
buy for my Julia?”
Julia looked at the shiny, apple-cheeked little Dutch girl who came
shyly towards her. She noticed the thin dress, the heavy shoes, the
ugly net over her yellow hair. Surely, Julia bought for herself lovelier
things than those.
Julia kept thinking. The strange child too was thinking, and drew
so near that she was scared at last to find herself so far from her
mother. She turned and ran back. The mother held out her arm,
hugged the little girl close to her heart, and kissed her between her
blue eyes.
That kiss told Julia what her father meant. Laying her head upon
his shoulder, she said, “I know, papa; she has her own dear mother.
But mine—O papa!”
Julia’s tears choked back the words that might have told you her
dear mother was in heaven.
Sitting there, Julia and her father felt how very poor she was in
losing mother-love and care and kisses, like that which blessed
those little strangers. The Germans had no house, no land—had
only money enough to take them West, where they must work hard
all day, early and late. But they had each other.
They might tell us that life and love are God’s best blessings.
Health and wealth are also his rich gifts, but not so dear—oh no! oh
no!
 CHAPTER II.
A RIDE.

At Catskill Mr. Cary and Julia left the boat; and Ellen, too, with her
hands full of baskets, bags, and wraps.
They walked aside from the crowd on the dock, towards a man
who was holding the reins of two bright bay horses.
This was uncle Benjamin. He had left his hay-field, ten miles away,
and come down to the river to welcome our travellers. Smiles and
black eyes lit up his sunburnt face cheerily.
If you had been looking off from the boat to see Julia go ashore,
you would have wished you too might have been lifted by his strong
arms into his easy carriage.
Ellen and the baskets were next put in. Mr. Cary sprang to the
front seat, and uncle Benjamin got up beside him.
The horses started as if they were in a hurry to get through the
bars of their green pasture-lot again. Away they went over the hills.
Julia thought there was no other man so good as uncle Benjamin.
She thought he owned all that country, that all the calves and colts
scampering about the farms they passed belonged to him, and many
an eager question she asked about what she saw.
“O uncle Benjamin!” she shouted at last, so quickly that he half
stopped his horses, as he turned to hear, “have you got any kittens
for me?”
“Ha! ha!” he laughed; “I thought you had dropped your hat or bag
in the road. Got any kittens? Can’t say. Charley or Johnny will know.”
A few more hills were crossed, and uncle Benjamin was at home.
Aunt Abby stood smiling at the open door; but the boys met the
carriage at the gate. They were in haste to see this dear little cousin
who came but once a year.
Before Mr. Cary had hung up his dusty linen coat, Julia whispered,
“Papa, they have got kittens, four of them. Please ask if I may
have one for my own self.”
Mr. Cary told aunt Abby how lonely Julia was at home without her
mother; how for weeks her heart had been so sad she could hardly
play at all. She was getting used to the stillness in the house, and
the heartache was wearing away. But she wanted some live thing to
play with, she said, and hoped to take home a real kitten.
“Poor little motherless girl!” sighed aunt Abby.
When called to tea, Julia came in smiling, with Charley and
Johnny, who had been showing her their out-door pets.
After tea, Julia led her father to the old woodhouse stairway, where
there was a more lowly kind of mother-love to be seen.
A large contented-looking cat lay on the door-step, winking
fearlessly at them. The cunningest of four kittens was climbing on
her back. Two prettier kittens were having a frolic at her feet, while
the other one sat soberly looking on. Sometimes the wild ones rolled
over and over each other down the steps.
“Did you ever see such lovely, pesshus kittens, papa dear?”
 “None so precious to you and this mother-cat,” her papa said,
smiling to see her so pleased.
“And I can have one! All the folks say so. Now help me find out,
papa, which is the bestest kitty.”
“I wish a mouse would come along; then I’d tell you which I think is
the best,” said Charley.
 “But I don’t care ’bout my kitty’s catching mice; I only want her to
play with me. She shall have milk to drink, and part of my dinner
every day.”
“Kittens would look prettier to me if I didn’t know they would grow
to be cats,” Johnny said.

“Bah! yes!” said Charley. “Up on that shed, by your bedroom

window—see, Julia—see that big striped cat! Johnny and I just loved
him when he was a kitten. But he kills our birds, and that we can’t
forgive.”
Up spoke kind-hearted Johnny: “I b’lieve he’s the wickedest,
badest cat that meows. So many nests he has spoiled! Then the
mother-birds cry and call so, we have to stop our ears. When I get a
gun, I b’lieve I’ll shoot you, Mr. Tom.”
 Johnny handled a willow-rod as if it were a gun, and pointed it up
at the big gray cat. But it did not fear him, it was up so high. Perhaps
it knew nothing about guns.
“Better go to bed now, Julia. Dream about the kittens, and in the
morning we will see which one we like the best.”
 CHAPTER III.
CHOOSING THE KITTEN.

In the morning two little girls, Anne and Rose, from the next
farmhouse, came to ask for a kitten.
Aunt Abby said Julia must first choose her own.
The liveliest kitty had a black-and-white coat, with black cap and
ears. Its clean white face and hands and feet pleased Julia so well,
that she tied her red ribbon around its neck.
Anne and Rose were just as content with the gray ones the boys
gave to them.
When they went away, each carried a kitten in her arms, and each
very sweetly asked Julia to come to see them.
“We will,” said aunt Abby, “to see how the kittens like their new
home.”
“Come here, Papa Cary,” this kind aunt said after breakfast, when
he sat under the cherry-tree reading his newspaper; “come to my
kitchen-door and see a pretty picture.”
Papa went with her, and saw his Julia trying to make the kitten
love her.
She had a basin of new milk, of which kitty had been drinking.
Now it was purring its thanks. Julia laid her fat cheek against its furry
side to hear the purr-purring sound.
“Dear little kitty, you will love me, wont you? My dollies just lie still,
and can’t love a bit. You nice, warm, live kitty, you wont let me be
lonesome any more.”
 CHAPTER IV.
LITTLE THIEVES.

So now there were only two kittens in aunt Abby’s house.

Julia found them in mischief that very day, up on the kitchen table.
Aunt Abby was getting ready to make a custard. She had gone to
the pantry for some eggs, and had left the milk on the table, and the
sugar-jar uncovered. When she stepped out of the kitchen, the
kittens stepped in. The flies, perhaps, had been in before.
No little boy or girl would meddle with sugar or milk left in the way;
but it is hard to teach kittens that it is wrong to touch what is not
theirs.