The art of forecasting – an analysis of predictive precision of machine learning models

Abstract: Forecasting is used for decision making and unreliable predictions can instill a false sense of condence. Traditional time series modelling is astatistical art form rather than a science and errors can occur due to lim-itations of human judgment. In minimizing the risk of falsely specifyinga process the practitioner can make use of machine learning models. Inan eort to nd out if there's a benet in using models that require lesshuman judgment, the machine learning models Random Forest and Neural Network have been used to model a VAR(1) time series. In addition,the classical time series models AR(1), AR(2), VAR(1) and VAR(2) havebeen used as comparative foundation. The Random Forest and NeuralNetwork are trained and ultimately the models are used to make pre-dictions evaluated by RMSE. All models yield scattered forecast resultsexcept for the Random Forest that steadily yields comparatively precisepredictions. The study shows that there is denitive benet in using Random Forests to eliminate the risk of falsely specifying a process and do infact provide better results than a correctly specied model.