Which of the following statements are true concerning time-series forecasting?
(I) All time-series forecasting methods are essentially extrapolative.
(ii) Forecasting models are prone to perform poorly following a structural break in a series.
(iii) Forecasting accuracy often declines with prediction horizon.
(iv) The mean squared errors of forecasts are usually very highly correlated with the profitability of employing those forecasts in a trading strategy.
A) (i), (ii), (iii), and (iv)
B) (i), (ii) and (iii) only
C) (ii), (iii) only
D) (ii) and (iv) only

Question

Quizplus · Accepted Answer

(i) Time-series forecasting methods extrapolate past trends and patterns into the future, assuming that these patterns will continue. (ii) A structural break, meaning a sudden and lasting change in the series' behavior, can significantly reduce the accuracy of forecasts. (iii) As the prediction horizon extends, the uncertainty usually increases, leading to a decline in forecasting accuracy. (iv) The correlation between mean squared errors of forecasts and the profitability of using those forecasts in trading strategies is not necessarily very high, as profitability also depends on factors like transaction costs and market timing.

Which of the Following Statements Are True Concerning Time-Series Forecasting