Unlock the Secret of Adding Confidence Bands to ARIMA Forecasts in EViews
Accurate forecasting is key to successful decision-making in any business. But when it comes to predicting future outcomes, the data can be unpredictable and unreliable due to many external factors. In this article, I will show you how to add confidence bands to your ARIMA forecast using EViews software. This software does not automatically generate the bands and I will teach you a simple step-by-step method for setting them up. If you want to be able to produce a graph like the one below, make sure to read the complete article!
Arima forecast with confidence bands in EViews
First Step: Estimate your ARIMA model and produce the forecast
The first step is of course, having a forecast produced by your model. You don’t know how to estimate ARIMA models in EViews? Then make sure to watch the following tutorial.
Now that you have your ARIMA model, click on the option “forecast”
Arima (1,1,3) Model Output- Eviews
Next, it is very important to use the option “S.E (optional)”. You will see that the field is empty by default. In this example, I typed “se” (for standard errors), but you can assign the name you want.
The option “S.E” in the EViews forecast window will generate the standard errors series for the forecasted period.
In our example, the sample we are forecasting is from 2020m11 to 2021m11.
Arima Forecast window - EViews
Once you are done selecting the options as in the picture, you will hit “OK”.
Eviews will generate the forecasted series with the name “cpif” and the standard errors with the name “se”.
Standard Errors Series - Eviews
That’s all! Now comes the easiest part! Manually calculating the upper bound and lower bound of the forecast.
You will click in the option “Genr”, and a window will pop up to write an equation.
To generate the upper bound, the equation is:
upper = cpif + 2*se
Forecast upper bound equation in EViews
To generate the lower bound, the equation is:
lower = cpif — 2*se
Forecast lower bound equation in EViews
The last step is to open the following series together as a group: cpi, cpif, upper, lower. Next you select the option “graph”, and you got it! Your forecast in EViews will now have confidence bands.
Now we have to work on the format of the picture so it can look like the one below:
To do so, please watch the complete tutorial below!
In conclusion,adding confidence bands to an ARIMA forecast using the software EViews is a relatively straightforward process. After following the step-by-step instructions outlined in this article, you should be able to construct your own confidence bands with ease. If you need further assistance, be sure to watch the accompanying videos for additional instruction and helpful tips.
