Question

Calculate 95% prediction intervals for each of the four forecasts

Answer 1

Answer:

The forecast errors are normally distributed, a 95% prediction interval for the

h

h

-step forecast is

^

y

T

+

h

|

T

±

1.96

^

σ

h

,

y^T+h|T±1.96σ^h,

where

^

σ

h

σ^h

is an estimate of the standard deviation of the

h

h

-step forecast distribution.

More generally, a prediction interval can be written as

^

y

T

+

h

|

T

±

c

^

σ

h

y^T+h|T±cσ^h

where the multiplier

c

c

depends on the coverage probability. In this book we usually calculate 80% intervals and 95% intervals, although any percentage may be used.

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