A Bayesian Model for Forecasting Hierarchically Structured Time Series

Abstract

An important task for any large-scale organization is to prepare forecasts of key performance metrics. Often these organizations are structured in a hierarchical manner and for operational reasons, projections of these metrics may have been obtained independently from one another at each level of the hierarchy by specialists focusing on certain areas within the business. There is no guarantee that when combined, these aggregates will be consistent with projections produced directly at other levels of the hierarchy. We propose a Bayesian hierarchical method that treats the initial forecasts as observed data which are then combined with prior information and historical predictive accuracy to infer a probability distribution of revised forecasts. When used to create point estimates, this method can reflect preferences for increased accuracy at specific levels in the hierarchy. We present simulated and real data studies to demonstrate when our approach results in improved inferences over alternative methods.