The theta model: A decomposition approach to forecasting

This paper presents a new univariate forecasting method. The method is based on the concept of modifying the local curvature of the time-series through a coefficient 'Theta' (the Greek letter θ), that is applied directly to the second differences of the data. The resulting series that are created maintain the mean and the slope of the original data but not their curvatures. These new time series are named Theta-lines. Their primary qualitative characteristic is the improvement of the approximation of the long-term behavior of the data or the augmentation of the short-term features, depending on the value of the Theta coefficient. The proposed method decomposes the original time series into two or more different Theta-lines. These are extrapolated separately and the subsequent forecasts are combined. The simple combination of two Theta-lines, the Theta = 0 (straight line) and Theta = 2 (double local curves) was adopted in order to produce forecasts for the 3003 series of the M3 competition. The method performed well, particularly for monthly series and for microeconomic data. © 2000 International Institute of Forecasters. Published by Elsevier Science B.V. All rights reserved.