Bivariate Forecasting with a Variable Leadtime

The assumption of a constant leadtime between a forecast variable and a leading indicator is difficult to support in a number of forecasting contexts, especially in relationships between economic variables. The forecasting method described uses a leading indicator and has the capability to handle varying leadtimes between the forecast variable and the leading indicator. This is achieved by modelling the behaviour of the leadtime as a Markov chain. The method is shown to be effective at detecting and reacting to changes in the leadtime by using simulated series, the only situation where the leadtime is known, and demonstrated on other series.