The concept of PIs in forecasting applications
PIs are vital tools in forecasting, providing a range of plausible values within which a future observation is likely to occur. Unlike point forecasts, which give a single best estimate, PIs communicate the uncertainty surrounding that estimate.
This section explores the fundamental concepts behind PIs and their significance in various forecasting applications.
Definition and construction
PIs are constructed around a point forecast to represent the range within which future observations are expected to lie with a given confidence level. For example, a 95% PI implies that 95 of 100 future observations are expected to fall within the defined range.
PIs can take several forms, depending on the approach used to generate them. Two key distinguishing factors are as follows:
