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Incorporating a Tracking Signal into State Space Models for Exponential Smoothing

Ralph Snyder () and Anne B. Koehler

No 16/06, Monash Econometrics and Business Statistics Working Papers from Monash University, Department of Econometrics and Business Statistics

Abstract: It is a common practice to complement a forecasting method such as simple exponential smoothing with a monitoring scheme to detect those situations where forecasts have failed to adapt to structural change. It will be suggested in this paper that the equations for simple exponential smoothing can be augmented by a common monitoring statistic to provide a method that automatically adapts to structural change without human intervention. It is shown that the resulting equations conform to those of damped trend corrected exponential smoothing. In a similar manner, exponential smoothing with drift, when augmented by the same monitoring statistic, produces equations that split the trend into long term and short term components.

Keywords: Forecasting; exponential smoothing; tracking signals. (search for similar items in EconPapers)
JEL-codes: C32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-for
Date: 2006-08
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