Forecast combination in revenue management demand forecasting

The domain of multi level forecast combination is a challenging new domain containing a large potential for forecast improvements. This thesis presents a theoretical and experimental analysis of different types of forecast diversification on forecast error covariances and resulting combined forecast quality. Three types of diversification are used: (a) diversification concerning the level of learning (b) diversification of predefined parameter values and (c) the use of different forecast models. The diversification is carried out on forecasts of seasonal factor predictions in Revenue Management for Airlines. After decomposing the data and generating diversified forecasts a (multi step) combination procedure is applied. We provide theoretical evidence of why and under which conditions multi step multi level forecast combination can be a powerful approach in order to build a high quality and adaptive forecast system. We theoretically and experimentally compare models differing with respect to the used decomposition, diversification as well as the applied combination models and structures. After an introduction into the application of forecasting seasonal behaviour in Revenue Management, a literature review of the theory of forecast combination is provided. In order to get a clearer idea of under which condition combination works, we then investigate aspects of forecast diversity and forecast diversification. The diversity of forecast errors in terms of error covariances can be expressed in a decomposed manner in relation to different independent error components. This type of decomposed analysis has the advantage that it allows conclusions concerning the potential of the diversified forecasts for future combination. We carry out such an analysis of effects of different types of diversification on error components corresponding to the bias-variance-Bayes decomposition proposed by James and