Forecasting within limits

February 21, 2014

(This article was first published on Hyndsight » R, and kindly contributed to R-bloggers)

It is common to want forecasts to be positive, or to require them to be within some specified range [a,b]. Both of these situations are relatively easy to handle using transformations.

Positive forecasts

To impose a positivity constraint, simply work on the log scale. With the forecast package in R, this can be handled by specifying the Box-Cox parameter \lambda=0. For example, consider the real price of a dozen eggs (1900–1993; in cents):

fit <- ets(eggs, lambda=0)
plot(forecast(fit, h=50))


Forecasts constrained to an interval

To see how to handle data constrained to an interval, imagine that the egg prices were constrained to lie within a=50 and b=400. Then we can transform the data using a scaled logit transform which maps (a,b) to the whole real line:

    \[y = \log\left(\frac{x-a}{b-x}\right)\]

where x is on the original scale and y is the transformed data.

# Bounds
a <- 50
b <- 400
# Transform data
y <- log((eggs-a)/(b-eggs))
fit <- ets(y)
fc <- forecast(fit, h=50)
# Back-transform forecasts
fc$mean <- (b-a)*exp(fc$mean)/(1+exp(fc$mean)) + a
fc$lower <- (b-a)*exp(fc$lower)/(1+exp(fc$lower)) + a
fc$upper <- (b-a)*exp(fc$upper)/(1+exp(fc$upper)) + a
fc$x <- eggs
# Plot result on original scale


The prediction intervals from these transformations have the same coverage probability as on the transformed scale, because quantiles are preserved under monotonically increasing transformations.

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