Forecasting aggregate demand: analytical comparison of top-down and bottom-up approaches in a multivariate exponential smoothing framework

Giacomo Sbrana and Andrea Silvestrini

No 929, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Forecasting aggregate demand is a crucial matter in all industrial sectors. In this paper, we provide the analytical prediction properties of top-down (TD) and bottom-up (BU) approaches when forecasting aggregate demand, using multivariate exponential smoothing as demand planning framework. We extend and generalize the results obtained by Widiarta, Viswanathan and Piplani (2009) by employing an unrestricted multivariate framework allowing for interdependency between the variables. Moreover, we establish the necessary and sufficient condition for the equality of mean squared errors (MSEs) of the two approaches. We show that the condition for the equality of MSEs also holds even when the moving average parameters of the individual components are not identical. In addition, we show that the relative forecasting accuracy of TD and BU depends on the parametric structure of the underlying framework. Simulation results confirm our theoretical findings. Indeed, the ranking of TD and BU forecasts is led by the parametric structure of the underlying data generation process, regardless of possible misspecification issues.

Keywords: top-down and bottom-up forecasting; multivariate exponential smoothing. (search for similar items in EconPapers)
JEL-codes: C32 C43 (search for similar items in EconPapers)
Date: 2013-09
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-for
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Citations: View citations in EconPapers (10)

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Journal Article: Forecasting aggregate demand: Analytical comparison of top-down and bottom-up approaches in a multivariate exponential smoothing framework (2013)
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