Interpretable models for forecasting high-dimensional functional time series

TL;DR

This paper introduces an interpretable framework combining FANOVA and functional factor models to improve forecasting of high-dimensional functional time series, exemplified by Japanese mortality data.

Contribution

It develops a novel, interpretable decomposition method for high-dimensional functional time series that enhances forecast accuracy and clarity over existing techniques.

Findings

FANOVA effectively decomposes mortality data into meaningful components.

Combining deterministic and stochastic models improves forecast accuracy.

The approach provides transparent insights into data drivers.

Abstract

We study the modeling and forecasting of high-dimensional functional time series, which can be temporally dependent and cross-sectionally correlated. We implement a functional analysis of variance (FANOVA) to decompose high-dimensional functional time series, such as subnational age- and sex-specific mortality observed over years, into two distinct components: a deterministic mean structure and a residual process varying over time. Unlike purely statistical dimensionality-reduction techniques, the FANOVA decomposition provides a direct and interpretable framework by partitioning the series into effects attributable to data-specific factors, such as regional and sex-level variations, and a grand functional mean. From the residual process, we implement a functional factor model to capture the remaining stochastic trends. By combining the forecasts of the residual component with the estimated deterministic structure, we obtain the forecasted curves for high-dimensional functional time series. Illustrated by the age-specific Japanese subnational mortality rates from 1975 to 2023, we evaluate and compare the accuracy of the point and interval forecasts across various forecast horizons. The results demonstrate that leveraging these interpretable components not only clarifies the underlying drivers of the data but also improves forecast accuracy, providing more transparent insights for evidence-based policy decisions.