Quantitative Forecasting—the State of the Art: Econometric Models

Abstract

Econometric model building for forecasting has developed substantially over the past 15 years. Nevertheless, operational researchers have neglected these new developments. This paper defines nine stages the forecaster must go through when developing an econometric model. Each stage is discussed with reference to the most recent research. The complexity of econometric model building requires the forecaster to adopt a modelling strategy. Two have been proposed in the literature; one moves from a specific model to a more general version, the second goes from the general to the specific. Five recent O.R. studies using econometric methodology are then evaluated, highlighting the common areas of weakness. They are those areas that econometricians have paid most attention to in their recent research. The paper then surveys the effectiveness of econometric models compared to alternative approaches, concluding with some recommendations to the O.R. worker in forecasting. In particular, it recommends that more attempts are made to develop econometric models for O.R. applications.