Description

Exogenous variables are external variables that are not influenced by other variables in the system but can affect the outcome of the system. They are often used in forecasting models to improve prediction accuracy.

How It Works

Exogenous variables work by providing additional information that the model can use to make more accurate predictions. These variables are input into the model along with the endogenous variables (variables within the system) to predict the outcome.

Benefits

• Improved Accuracy: Incorporating exogenous variables can improve the accuracy of forecasts.
• Context Incorporation: Exogenous variables allow the model to incorporate external factors that may affect the outcome.

Limitations

• Data Availability: The effectiveness of exogenous variables depends on the availability and quality of data for these variables.
• Complexity: Incorporating exogenous variables can increase the complexity of the model.

Features

• External Influence: Exogenous variables represent influences external to the system being modeled.
• Model Input: Exogenous variables are used as inputs in the model along with endogenous variables.

Use Cases

• Economic Forecasting: Exogenous variables like interest rates or inflation can be used in economic forecasting models.
• Sales Forecasting: Variables like holidays or promotions can be used as exogenous variables in sales forecasting models.
• Weather Forecasting: Variables like solar radiation or geographical factors can be used as exogenous variables in weather forecasting models.