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  • Pure_Shrinkage_Estimator_for_Exponential_Smoothing_Models

    Rights statement: This is the author’s version of a work that was accepted for publication in International Journal of Forecasting. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in International Journal of Forecasting, 39 (2), pages 1351-1365, 2023 DOI: 110.1016/j.ijforecast.2022.07.005

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    Available under license: CC BY-NC-ND: Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License

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Shrinkage Estimator for Exponential Smoothing Models

Research output: Contribution to Journal/MagazineJournal articlepeer-review

Published
<mark>Journal publication date</mark>31/07/2023
<mark>Journal</mark>International Journal of Forecasting
Issue number3
Volume39
Number of pages15
Pages (from-to)1351-1365
Publication StatusPublished
Early online date12/08/22
<mark>Original language</mark>English

Abstract

Exponential smoothing is widely used in practice and has shown its efficacy and reliability in many business applications. Yet there are cases, for example when the estimation sample is limited, where the estimated smoothing parameters can be erroneous, often unnecessarily large. This can lead to over-reactive forecasts and high forecast errors. Motivated by these challenges, we investigate the use of shrinkage estimators for exponential smoothing. This can help with parameter estimation and mitigating parameter uncertainty. Building on the shrinkage literature, we explore ℓ 1 and ℓ 2 shrinkage for different time series and exponential smoothing model specifications. From a simulation and an empirical study, we find that using shrinkage in exponential smoothing results in forecast accuracy improvements and better prediction intervals. In addition, using bias–variance decomposition, we show the interdependence between smoothing parameters and initial values, and the importance of the initial value estimation on point forecasts and prediction intervals.

Bibliographic note

This is the author’s version of a work that was accepted for publication in International Journal of Forecasting. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in International Journal of Forecasting, 39 (2), pages 1351-1365, 2023 DOI: 110.1016/j.ijforecast.2022.07.005