Question 13.62

13.62 Just use last month’s figures!

Working with the financial analysts at your company, you discover that, when it comes to forecasting various time series, they often just use last period’s value as the forecast for the current period. As noted in the chapter, this is known as a naive forecast (page 660).

  1. If you could pick the estimates of and in the AR(1) model, could you pick values such that the AR(1) forecast equation would provide the same forecasts your company’s analysts use? If so, specify the values that accomplish this.
  2. What span in a moving-average forecast model would provide the same forecasts your company’s analysts use?
  3. What smoothing constant in a simple exponential smoothing model would provide the same forecasts your company’s analysts use?
  4. Under what circumstances is the naive forecast that your company’s analysts are using the most appropriate option? Explain your response.