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ECONOMETRIC MODELLING AND FORECASTING OF FREIGHT
TRANSPORT DEMAND IN GREAT BRITAIN

Shujie Shen, Tony Fowkes, Tony Whiteing and Daniel Johnson
Institute for Transport Studies, University of Leeds, Leeds, UK, LS2 9JT

1. INTRODUCTION
Empirically derived estimates of freight transport demand elasticities and
accurate forecasts of future demand are important for freight planning and
policy making. The sensitivity of freight transport demand to the changes of its
determinants can help policy makers to evaluate alternative policy options in
controlling future freight transportation growth, emissions reductions or modal
shift. Accurate forecasts can provide information on future freight transport
levels in the appraisal of freight transport related projects and transport
policies. From the sustainability standpoint, it is important to be able to
forecast future freight volumes, so that the impacts of any environmental
policy initiatives can be compared against the do-nothing scenario.
Econometric models can not only forecast future demand but can also explain
economic or business phenomena and increase our understanding of
relationships among variables. This study applies state of the art econometric
models to the analysis of road plus rail freight transport demand in Great
Britain (GB). This work has been carried out as part of the EPSRC-funded
Green Logistics project, which examines the sustainability of logistics
systems and supply chains and is currently being undertaken by a consortium
of 6 UK universities, supported and steered by a range of project partners
including the Department for Transport and CILT (UK).
The movement of goods around GB increased markedly over the period 1978-
2007, from 178 billion tonne kilometres in 1978 to 255 billion tonne kilometres
in 2007. Road and rail have taken a substantial share of total freight
movements. In 2007, 76 percent of freight was moved by road and rail, only
24 percent by water and pipelines (DfT, 2008). Figure 1 shows the trend of the
demand for road and rail freight transport over the past 30 years. It can be
seen that the road freight demand has experienced sustained increases while
rail freight demand decreased until 1993 and has recovered since. We will
focus on the road plus rail freight demand in this study.
Due to the dominant role of road and rail in the GB freight transport sector,
modelling and forecasting GB road plus rail freight demand can provide useful
information for both transportation planners and policy makers. Six
econometric methods are applied to GB road plus rail freight transport
demand modelling and forecasting, at both aggregate and disaggregate
(commodity group) levels. The econometric models applied are: the traditional
OLS regression model, the Partial Adjustment (PA) model, the reduced
Autoregressive Distributed Lag model (ReADLM), the unrestricted Vector
Autoregressive (VAR) model, the Time-Varying-Parameter (TVP) model, and
the Structural Time Series model (STSM). Elasticity estimates with respect to
measures of economic activity are provided and the relative forecasting
accuracy of the alternative econometric models is evaluated.
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Figure 1 Demand for Road and Rail Freight Transport in GB (Goods Moved)
Source: DfT (2008)

2. BACKGROUND
In the freight demand literature, most previous studies focus on freight
demand modelling, examining elasticities or modal choice based on either
cross-section data or time series data (see for example, the surveys by
Zlatoper and Austrian, 1989; Graham and Glaister, 2004 and de Jong et al,
2004). Few studies of freight demand have employed the recent
developments in multivariate dynamic econometric time series modelling, with
notable exceptions being Bjrner (1999), Kulshreshtha, Nag and Kulshrestha
(2001) and Ramanathan (2001). Bjrner (1999) carried out an empirical
analysis on freight transport in Denmark in a cointegrating Vector
Autoregressive (VAR) system. Kulshreshtha et al. (2001) also applied the
cointegrating VAR model in modelling Indian railways freight transport
demand. Ramanathan (2001) applied a Cointegration (CI) and Error
Correction Model (ECM) in modelling and forecasting both passenger and
freight transportation demand in India. As far as we know, other recent
econometric models, such as the TVP model and the STSM, have not been
applied in the freight demand literature. Furthermore, none of the studies has
evaluated the forecasting performance of alternative models.
This paper aims to fill this gap in the literature by applying state of the art
econometric time series models to modelling the road plus rail freight demand
in GB. It presents a relatively comprehensive comparison of the forecasting
performance of these econometric forecasting models within the freight
demand context. Although the Cointegration and ECM approaches can both
illustrate the long-run equilibrium relationship between the freight demand and
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its determinants and capture the short-run dynamic characteristics of freight
demand, they are not applied in this study as the some of the data series
under examination were considered to be unsuited to cointegration analysis.
For GB freight demand econometric work, two major studies should be
mentioned here: Fowkes et al. (1993) and the National Road Traffic Forecasts
in DfT (1997). Fowkes et al. (1993) applied the traditional OLS regression
model and the PA model to estimate road freight demand for 15 commodity
groups using time series data, with the freight demand being measured both
in tonnes lifted and tonne kilometres moved. Based on that work DfT (1997)
used the OLS regression model and the PA model to generate the forecasts
of tonnes lifted as the basis for forecasting vehicle kilometres over the period
1995-2031 at sector level. By applying state of the art econometric time
series models we aim to update such earlier work, making use of the new
methods to provide further empirical evidence for the freight literature.

3. METHODOLOGY
In this paper we apply six econometric models to GB road plus rail freight
transport demand forecasting. The econometric models applied are: the
traditional OLS regression model, the PA model, the ReADLM, the VAR
model, the TVP model and the STSM. Apart from the OLS regression model,
the other econometric models have shown their advantages in previous
empirical studies in other economic fields.
Diagnostic checking is used in the study because of its importance in
econometric modelling. Normally in model selection the functional form should
be specified correctly and the final model should not exhibit autocorrelation,
heteroscedasticity and non-normality. The diagnostic tests used in the study
are as follows: the Lagrange Multiplier test for serial correlation (Breusch,
1978 and Godfrey, 1978); the Jarque-Bera test for non-normality (Jarque and
Bera, 1980); the RESET test for mis-specification (Ramsey, 1969) and the
White test for heteroscedasticity (White, 1980).
The OLS Regression Model
The traditional OLS regression model takes the form:
t
I
i
it i t
x y + + =

=1
(1)
where
t
y is the dependent variable,
it
x is the ith explanatory variable, I is the
number of explanatory variables, and
i
are the coefficients that need to be
estimated empirically,
t
is normally and independently distributed random
error with zero mean and constant variance.
The traditional regression model assumes that the data series are stationary.
Hence when the data series are not stationary there may be a problem of
spurious regression.
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The Partial Adjustment (PA) Model
The partial adjustment model has been extensively used in modelling
macroeconomic data being interpretable as a lagged effect or an adaptive
expectations process. It can be specified as follows:

t t
I
i
it i t
y x y + + + =

=
1
1
(2)
where 1 0 < ,
t
y is the dependent variable,
it
x is the ith explanatory
variable, I is the number of explanatory variables, and
i
are the
coefficients that need to be estimated empirically,
t
is normally and
independently distributed error term. The adjustment parameter, 1 ,
measures the speed of adjustment. The closer it is to 1 the faster the speed of
adjustment. For applications of the PA model see Dargay and Hanly (1999)
and Dargay and Hanly (2002).
The Reduced Autoregressive Distributed Lag Model (ReADLM)
Following the modern econometric methodology General-to-specific
approach, the specification starts with a general autoregressive distributed lag
model (ADLM). The original form of ADLM is as follows:
t
J
j
j t j
I
i
J
j
j t i ij t
y x y + + + =

=

= =

1 1 0
,
(3)
The equation incorporates as many explanatory variables as possible,
supported by appropriate economic theory, where J is the lag length which is
determined by the type of data used, I is the number of explanatory variables,
and
t
is the error term as explained above. As a general guide J=1 for annual
data, but the lag lengths may vary and are normally decided by
experimentation (see Thomas, 1997).
The reduction procedure of the Reduced ADLM is as follows. Insignificant
variables, including dummy variables, are removed from the equation one by
one. Usually the least significant variable (the one with the lowest t statistic) is
deleted from the model, and the reduced model is re-estimated. This process
is repeated until all the remaining coefficients of the variables are statistically
significant at least at the 5% significance level and have the correct signs (see
Song, Witt and Jensen, 2003).
The Time Varying Parameter (TVP) Model
The TVP model relaxes the constancy restriction on the parameters of a
traditional econometric model by allowing them to change over time. The TVP
model is normally specified in state space (SS) form:
t
I
i
it it t t
x y + + =

=1
0
(4)
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t it it
u + =
1
I i , , 1 , 0 L = (5)
where
t
y is the dependent variable,
it
x is the ith explanatory variable,
it
is
assumed to be adaptive in nature and is modelled in Equation (4) as a
random-walk.
t
and
t
u are normally and independently distributed random
errors with zero mean and constant variances.
Equation (4) is called the observation equation, and Equation (5) is known as
the state equation. Once the SS model is formulated, it can be estimated
using an algorithm known as the Kalman filter (Kalman, 1960). The Kalman
filter algorithm is a recursive procedure for calculating the optimal estimator of
the state vector given all the information available at time t. For applications of
the TVP model refer to Li et al. (2006) and Song, Romilly and Liu (1998).
The Vector Autoregressive (VAR) Model
The VAR model is an equation system in which all variables are treated as
endogenous. However, unlike the structural approach to simultaneous-
equation modelling that normally deals with endogenous variables, the VAR
approach models every endogenous variable in the system as a function of
the lagged values of all the variables in the system. The VAR model is
specified as follows:
t
I
i
J
j
j t i ij
J
j
j t j t
x y y
0
1 1
, 0
1
0 00
+ + + =

= =


t
I
i
J
j
j t i ij
J
j
j t j t
x y x
1
1 1
, 1
1
1 10 1
+ + + =

= =


M
It
I
i
J
j
j t i Iij
J
j
j t Ij I It
x y x + + + =

= =

1 1
,
1
0
(6)
where , and are coefficients and
t
are normally and independently
distributed random errors. It is important to determine the lag length of the
VAR model as too many lags will result in over-parameterisation while too few
lags will result in loss of information in forecasting. Criteria such as the
likelihood ratio (LR) statistic, Akaike Information Criterion (AIC) or Bayesian
Information Criterion (BIC) are used to determine the lag length of the VAR
model (see Song and Witt, 2006).
The Structural Time Series Model (STSM)
By including time-varying components in the regression equation, the STSM
suggested by Harvey (1989) can capture movements not explained by
explanatory variables. The model can be represented by the following form:
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t
I
i
it i t t
x y + + =

=1
(7)
where
t
y is the dependent variable;
t
and
t
are the trend and irregular
components, respectively;
it
x is the ith explanatory variable, and
i
is its
unknown parameter to estimate.
The stochastic formulation for the trend component is following Harvey (1989),
which includes level and slope:
t t t t
+ + =
1 1
(8)

t t t
+ =
1
(9)
where
t
and
t
are normally and independently distributed. The extent to
which the level and slope change over time is governed by the
hyperparameters
2

and
2

(the variances of
t
and
t
). For applications
see Dimitropoulos, Hunt and Judge (2005) and Thury and Witt (1998).

4. DATA
The analysis presented in this paper is carried out based on annual data on
the road plus rail freight demand in GB at both aggregate and commodity
group level for the period 1974-2006. The freight demand is measured in
billion tonne-kilometres moved. The time series data for both road and rail
freight demand are presented in Johnson et al. (2008). They are available by
the following commodity groups:
A: Food, Drink and Agricultural Products
B: Coal and Coke
C: Petrol and Petroleum Products
D: Metals and Ores
E: Construction
F: Chemicals and Fertiliser
G: Others, including Machines, Manufactured Goods and Miscellaneous
Mixed Loads etc.
In this paper, we are particularly interested in the elasticity of freight demand
with respect to the level of economic activity, of which the most appropriate
proxy is industrial production. Hence the freight transport demand function can
be written in the following general form:
) , ( dummies LIIP f LZK
kt kt
= (10)
where the prefix L denotes that the data series are in logarithmic form, Z for
road plus rail, K for tonne kilometres, and the subscript k refers to the
commodity group k and also for the total;
kt
IIP is the Index of Industrial
Production (2003=100) for commodity group k (and total), a proxy for the
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economic activity in that sector. The series on
kt
IIP are obtained from the
Office for National Statistics (ONS, 2009a). As there are no exact production
sectors matching the commodity group categories listed above, the closest
sectors are chosen as proxies.
In addition to the sector level
kt
IIP , other proxies of economic activity were
tried in the models by way of comparison. These include: the Gross Domestic
Product (GDP) of the UK in constant prices (2003=100), the total production
output plus total imports (
t
IIPIM measured in tonnes) and the aggregate
t
IIP .
The series on GDP were obtained from the International Financial Statistics
Yearbooks published by the International Monetary Fund (IMF). In the
absence of a data series for
t
IIPIM , measured in tonnes, this was derived
from an index of IIP and the known tonnes for one particular year, to which
tonnes of imports for each year were then added.
Dummy variables are included in the models to capture the effects of one-off
events on the road plus rail freight demand in GB when appropriate. Among
them DUM84 represents the UK miners strike in 1984 (DUM84=1 in 1984, 0
otherwise) and is included in the models for Commodity B (Coal and Coke).
DUM81 and DUM86 represent oil price shocks of 1981 and 1986, respectively
(DUM81=1 in 1981 and 0 otherwise; DUM86=1 in 1986 and 0 otherwise).
They are included in the models for Commodity C (Petrol and Petroleum
Products). DUM80 is included in the models for Commodity D (Metals and
Ores) and Total to represent the steel workers strike in 1980 (DUM80=1 in
1980 and 0 otherwise). These events may have negative effects on the GB
road plus rail freight demand. DUM88 is a level dummy variable, representing
an upward shift in the data series of road plus rail freight demand for
Commodity G (Others) since 1988 (DUM88=1 in 1988 and onwards, 0
otherwise).
We also experimented with a price variable. In the absence of information on
actual freight prices due to commercial confidentiality, an index of real road
operating costs was used as a proxy. These were calculated using figures
from the SOFTICE study (Gacogne et al, 1999) and then updated with more
recent figures from the RHA (2009), all deflated by the Retail Prices Index
(ONS, 2009b).

5. EMPIRICAL RESULTS
5.1 Estimation Results of the Econometric Models
The six econometric models are used to model and forecast GB road plus rail
freight demand at both aggregate and disaggregate levels. The STSM is
estimated using STAMP 7.0, and the others using Eviews 6.0. Models were
estimated using a range of proxies of economic activity (i.e. GDP, IIPIM
t
and
IIP
t
) as well as those with IIP
kt
, and price variables were also included. Due to
the space constraint the full estimation results are not presented in this paper
but are available upon request. The estimation results of the models with IIP
kt

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are presented in Tables 1 to 6 respectively, based on the full sample period
1974-2006.
OLS Regression Models
Table 1 shows that industrial production is an important determinant of the
road plus rail freight transport demand in GB, judged by the significance of the
coefficient estimates in all the cases. For one-off events, the UK miners strike
in 1984 had an adverse influence on the freight demand for Coal & Coke (B).
The oil price shock in 1986 has been shown to affect the road plus rail freight
demand for Petrol and Petroleum Products (C) adversely. The Steel workers
strike in 1980 had negative effect on road plus rail freight demand for Metals
and Ores (D) but is not significant in the model for Total demand. The level
dummy variable DUM88 is significant in the model for Others (G), which
confirmed that there is an upward shift in the road plus rail freight demand
series for this sector.
Table 1 Estimation Results of the OLS Regression Models
ZKA ZKB ZKC ZKD ZKE ZKF ZKG ZKTOT
Constant
-11.575**
(0.575)
1.555**
(0.177)
-0.613
(0.712)
-1.863*
(0.756)
0.281
(0.165)
1.619**
(0.275)
-0.709
(2.075)
-1.503**
(0.278)
LIIP
kt


3.388**
(0.127)

0.108**
(0.031)
0.562**
(0.151)
0.924**
(0.162)
0.701**
(0.038)
0.159*
(0.065)
0.964*
(0.475)

1.467**
(0.062)
DUM80
-0.149*
(0.083)

-0.033
(0.048)
DUM81
-0.111
(0.072)

DUM84
-0.461**
(0.133)

DUM86
-0.248**
(0.070)

DUM88
0.397**
(0.115)

2
R
0.957 0.420 0.453 0.546 0.914 0.136 0.834 0.948
S.E. 0.057 0.131 0.068 0.080 0.044 0.103 0.138 0.047
NORM(2) 0.670 1.837 0.468 0.211 1.003 0.854 1.843 1.381
LMSC(2) 8.631* 17.881** 2.180 15.889** 7.843* 12.314** 21.635** 29.522**
HETRO(1) 0.005 9.657** 0.720 0.477 0.216 1.152 4.535* 1.692
RESET(1) 1.378 57.887** 1.821 6.112* 0.941 48.117** 18.001** 22.472**
Notes: * and ** indicate that the estimates are significantly different from 0 at 5% and 1%
levels respectively. Values in parentheses are standard errors. NORM(2) is the Jarque-Bera
normality test, LMSC(2) is the Lagrange multiplier test for serial correlation, HETRO(1) is the
heteroscedasticity test, RESET(1) is Ramseys misspecification test.
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Only in the case of commodity group C did the models pass all of the
diagnostic tests at the 5% significance level. The models are subject to the
problem of serial correlation in all of the other cases. The model for the Total
demand failed the misspecification test at the 1% significance level. The fact
that the models failed at least one diagnostic test in seven out of the eight
cases is not surprising, as the disadvantage of the OLS regression model is
that when the data series are not stationary a problem of spurious regression
will occur.
PA Models
By including the demand in the previous period in the model, the PA model
brings the dynamic partial adjustment process into the traditional regression
model. Table 2 shows the estimated results.

Table 2 Estimation Results of the PA Models
ZKA ZKB ZKC ZKD ZKE ZKF ZKG ZKTOT
Constant
-3.330*
(1.510)

0.868**
(0.258)
-0.579
(0.704)
-0.912
(0.774)
0.167
(0.178)
0.811*
(0.326)
-1.098
(0.752)
-0.511**
(0.182)
LZK
kt-1

0.699**
(0.123)
0.477**
(0.141)
0.360*
(0.145)
0.571**
(0.142)
0.256
(0.154)
0.610**
(0.159)
0.840**
(0.059)
0.670**
(0.072)
LIIP
kt


0.990*
(0.432)

0.048
(0.032)
0.400*
(0.171)
0.421*
(0.211)
0.531**
(0.109)
0.020
(0.062)
0.385*
(0.182)

0.490**
(0.110)
DUM80
-0.237**
(0.071)

-0.092**
(0.026)
DUM81
-0.112
(0.066)

DUM84
-0.527**
(0.117)

DUM86


-0.204**
(0.068)

DUM88
0.019
(0.048)

2
R
0.977 0.566 0.548 0.699 0.917 0.387 0.979 0.986
S.E. 0.041 0.113 0.063 0.065 0.043 0.084 0.047 0.024
NORM(2) 6.108* 0.313 1.998 0.475 1.930 2.486 0.485 2.793
LMSC(2) 3.963 7.928* 2.598 1.059 5.744 3.397 1.419 14.511**
HETRO(1) 0.809 4.203* 0.510 0.207 0.155 0.699 2.599 0.293
RESET(1) 0.0003 5.543* 0.405 1.418 0.032 0.015 4.796* 0.521
Notes: Same as Table 1.
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The estimated coefficients of the
kt
IIP are significant and have the expected
sign for all commodity groups apart from B and F, which again confirms that
industrial production is the key determinant of GB road plus rail freight
demand at both aggregate and disaggregate level. The estimated coefficients
for Coal & Coke (B) and Chemicals & Fertiliser (F) are not significant but have
the anticipated sign. The lagged dependent variables are significant in all the
cases except Construction (E). For one-off events, DUM84 is significant with
right sign in the model for Coal & Coke (B), and the oil price shock in 1986
affected the road plus rail freight demand for Petrol and Petroleum Products
(C) adversely. The Steel workers strike in 1980 had a negative effect on road
plus rail freight demand for Metals and Ores (D) and on Total demand. The
level dummy variable DUM88 is not significant in the model for Others (G).
The PA models passed all the diagnostic tests in four out of the eight cases.
The model for Coal & Coke (B) failed three diagnostic tests. The models
passed all but one tests in the other three cases.
Reduced ADLM
The initial specification of the general ADLM includes all possible variables.
The lag length of the ADLM is set to be one (J=1) as the data we used is
annual data. The final models are achieved by dropping the variables with
coefficients that are incorrectly signed and / or insignificant. Results for these
reduced ADLMs are presented in Table 3.
The estimates of the Reduced ADLM suggest that the industrial production in
the current period shows its significant impact on the road plus rail freight
demand in GB in all of the cases except commodity groups B and F.
Moreover, the industrial production in the previous year has an influence on
the road plus rail freight demand for commodity groups D and G. The lagged
dependent variables are significant in all the cases except Construction (E).
The oil price shock in 1986 had negative effect on the freight demand for
commodity group C. The steel workers strike affected the total demand
adversely. Only in four out of eight cases did the models pass all of the
diagnostic tests.
VAR Model
The specification of the VAR model starts with an unrestricted form. Dummies
are regarded as exogenous variables in VAR models. The maximum lag
length of the VAR model is set to be 3 for the purpose of identifying the
appropriate lag structure of the VAR models. The optimal lag structure of the
VAR model is decided on the AIC and BIC with the adjusted Likelihood Ratio
(LR) being considered as references. The estimates of the VAR models are
presented in Table 4.
The
1 kt
IIP variable is only significant in the case of Construction (E). The
lagged dependent variable features in all the cases. This suggests that the
lagged dependent variable is the key determinant of road plus rail freight
demand in GB. All of the dummy variables are significant and have expected
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Table 3 Estimation Results of the Reduced ADLMs
Notes: Same as Table 1.
ZKA ZKB ZKC ZKD ZKE ZKF ZKG ZKTOT
Constant
-3.330
(1.510)

1.035**
(0.339)
-0.905
(0.700)
-0.718
(0.767)
0.281
(0.165)
0.838*
(0.311)
-0.669
(0.440)
-0.511**
(0.182)
LZK
kt-1

0.699**
(0.123)
0.517**
(0.158)
0.352*
(0.150)
0.689**
(0.151)


0.636**
(0.135)
0.920**
(0.049)
0.670**
(0.072)
LIIP
kt

0.990*
(0.432)

0.472*
(0.171)
1.187**
(0.239)
0.701**
(0.038)

0.837**
(0.168)
0.490**
(0.110)
LIIP
k,t-1

-0.871**
(0.239)

-0.614**
(0.180)

DUM80
-0.092**
(0.026)
DUM81
DUM84
DUM86
-0.206**
(0.070)

DUM88
2
R
0.977 0.239 0.518 0.714 0.914 0.405 0.985 0.986
S.E. 0.041 0.150 0.065 0.063 0.044 0.082 0.040 0.024
NORM(2) 6.108* 23.319** 1.653 0.051 1.003 2.162 0.058 2.793
LMSC(2) 3.963 1.298 0.686 3.430 7.843* 1.478 2.429 14.511**
HETRO(1) 0.809 0.132 0.596 0.118 0.216 0.205 1.692 0.293
RESET(1) 0.0003 5.711* 0.575 0.313 0.941 0.072 3.869 0.521
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Table 4 Estimation Results of the VAR models
Notes: Same as Table 1.

Table 5 Estimation Results of the TVP Models
Notes: Same as Table 1.
ZKA ZKB ZKC ZKD ZKE ZKF ZKG ZKTOT
Constant
-1.441
(1.688)
0.894**
(0.265)
0.302
(0.696)
0.339
(0.758)
0.155
(0.217)
0.831*
(0.328)
1.308
(0.746)
-0.167
(0.237)
LZK
kt-1

0.848**
(0.139)
0.516**
(0.155)
0.447**
(0.158)
0.734**
(0.164)
0.440*
(0.217)
0.629**
(0.159)
0.915**
(0.066)
1.277**
(0.200)
LZK
kt-2

-0.546**
(0.197)
LIIP
kt-1

0.450
(0.485)
0.028
(0.038)
0.175
(0.171)
0.066
(0.218)
0.396*
(0.159)
0.005
(0.064)
-0.226
(0.187)
0.071
(0.249)
LIIP
kt-2

0.273
(0.264)
DUM80
-0.293**
(0.073)

-0.132**
(0.027)
DUM81
-0.141*
(0.070)

DUM84
-0.559**
(0.120)

DUM86
-0.160*
(0.070)

DUM88
0.113*
(0.046)

2
R
0.974 0.540 0.477 0.658 0.875 0.385 0.977 0.983
S.E. 0.044 0.117 0.068 0.069 0.053 0.084 0.050 0.026
LMSC(2) 4.013 4.220 3.308 3.421 2.972 5.325 1.944 1.583
NORM(2) 5.882 0.873 3.356 2.235 1.967 10.495* 2.194 2.128
HETRO(1) 9.104 25.743* 12.783 13.202 17.209 29.424** 25.610* 26.374

ZKA ZKB ZKC ZKD ZKE ZKF ZKG ZKTOT
Constant -3.201
(2.050)
1.924**
(0.484)
0.678
(0.857)
-1.903*
(0.903)
0.775
(0.763)
0.764
(1.186)
0.751
(0.777)
0.927
(0.658)
LIIP
kt
1.569**
(0.442)
0.099
(0.118)
0.310*
(0.183)
0.892**
(0.194)
0.599**
(0.164)
0.296
(0.253)
0.761**
(0.169)
0.958**
(0.143)
DUM80 -0.105 -0.035
DUM81 -0.044
DUM84 -0.506
DUM86 -0.124
DUM88 0.108
Log
likelihood
39.097 8.288 21.456 29.050 34.988 17.429 37.935 56.551
SC -2.051 -0.078 -0.771 -1.337 -1.803 -0.738 -1.875 -3.003
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Table 6 Estimation Results of the STSMs
Note: * and ** indicate that the estimates are significant at the 5% and 1% levels, respectively.
Values in parentheses are standard errors. HETRO is the heteroscedasticity test and Q-
statistic is the Box-Ljung Q-statistic test for residual serial correlation.
ZKA ZKB ZKC ZKD ZKE ZKF ZKG ZKTOT
Hyperparameters

Level 0.00110 7.083e-5 0.00349 0.000354 6.155e-6 0 0.001485 0
Slope 0 0.000313 2.692e-7 8.389e-5 0 5.146e-5 0 0.000566
Irregular 0.000334 0.003972 0.003189 0.001465 0.001757 0.004047 0 0
Coefficients

Level
0.079
(2.346)
0.714
(0.590)
-0.385
(0.770)
-2.940**
(0.755)
-0.641
(0.518)
-2.614
(1.353)
1.381
(0.743)
2.025**
(0.585)
Slope
0.017*
(0.007)
0.120**
(0.034)
0.003
(0.004)
-0.036
(0.018)
-0.004
(0.002)
-0.047**
(0.017)
0.025**
(0.007)
0.014
(0.024)
LIIP
kt

0.862*
(0.506)
0.383*
(0.141)
0.528**
(0.164)
1.126**
(0.162)
0.897**
(0.111)
1.028**
(0.288)
0.628**
(0.165)
0.720**
(0.127)
Dum80
-0.080
(0.047)

-0.042**
(0.010)
Dum81
-0.086
(0.063)


Dum84
-0.252*
(0.135)


Dum86
-0.205**
(0.065)


Dum88
0.087*
(0.042)

Diagnostic Tests

Normality 3.759 4.756 0.518 2.318 1.833 3.981 3.567 10.084**
H(8) 0.646 9.440* 1.089 2.106 0.387 2.910 0.131 1.411
DW 2.068 2.019 2.003 1.912 1.360 1.727 1.366 1.837
Q -statistic 4.132 3.880 0.668 1.390 12.387** 5.336 2.214 6.305
Rd
2
0.086 0.720 0.378 0.596 0.392 0.226 0.481 0.613
Se 0.040 0.087 0.063 0.055 0.043 0.077 0.037 0.022
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signs. The models passed all the diagnostic tests in five out of the eight
cases.
TVP Models
Results for the TVP models, estimated using the Kalman filter algorithm, are
presented in Table 5. It should be noted that in TVP models dummy variables
are treated as exogenous variables whose parameters do not vary with time.
However, the significance of the dummy variables is not reported by the
Eviews 6.0 programme. The parameters reported are the estimates at the end
of the sample period.
The coefficients of the
kt
IIP have the expected signs and are significant in all
cases but two, i.e., Coal & Coke (B) and Chemicals & Fertiliser (F), which is
consistent with the results from some of the fixed parameter models. This
suggests that industrial production explains well the road plus rail freight
demand in GB.
STSM
By including a stochastic trend component in the regression equation, one can
capture movement in freight demand series which is not explained by the
explanatory variables included and would otherwise be left in the residuals.
Table 6 shows that
kt
IIP is significant in all of the cases. For one-off events,
DUM84 is significant with right sign in the model for Coal & Coke (B), and the
oil price shock in 1986 affected the road plus rail freight demand for Petrol and
Petroleum Products (C) adversely. The steel workers strike in 1980 had
negative effect on Total demand. The level dummy variable DUM88 is
significant in the model for Others (G). The models passed all of the
diagnostic tests in five out of the eight cases.
5.2 Long-run Elasticity Analysis
The long-run elasticities from the OLS regression model, the TVP model and
STSM are obtained directly from the estimated coefficients of the independent
variables in the models. For the PA model, reduced ADLM and VAR model,
the lagged variables are treated as the current values of the variables in the
long-run and the elasticities are calculated using the estimated coefficients of
the explanatory variables. Taking the PA model as an example, the long-run
income elasticities are calculated as the estimated coefficient of the industrial
production variable (IIP) divided by the adjustment coefficient ( 1 ), where
is the estimated coefficient of the lagged dependent variable.
Estimates of long-run elasticities of road plus rail freight transport demand
with respect to industrial production (economic activity) from alternative
econometric models are compared. The results are presented in Table 7.

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Table 7 Comparison of Estimated Elasticities with respect to Industrial
Production
Note: * and ** indicate that the elasticities are based on estimated parameters significant at
the 5% and 1% levels, respectively. - denotes that the variable is insignificant in the reduced
ADLM and hence was deleted in the estimation procedure.

It can be seen that the estimated elasticity values vary across commodity
groups, which indicates that the composition of the economy has an influence
on income elasticities of the demand for road plus rail freight in GB. The OLS
regression model, the PA model and the reduced ADLM are more consistent
with each other in terms of the significance of variables and the magnitudes of
estimated elasticity values, while the results from the TVP model and STSM
are similar to each other.
The elasticities of road plus rail freight demand with respect to economic
activity (which is a form of income elasticity) vary across different commodity
groups. This indicates different sensitivity to variations in industrial production
for different market sectors. The actual magnitude of income elasticity
estimates also vary due to the different models estimated. For Food Drink &
Agricultural Products (Group A), the income elasticities from the OLS
regression model and the PA model (the reduced ADLM collapses to the PA
model in this case) are consistent but extremely high (3.388 and 3.289). The
derived income elasticity from the VAR model is similarly high at 2.961. The
values from the TVP model and the STSM are 1.569 and 0.862 respectively.
This gives the range of income elasticity from 0.862 to 3.388 in this sector,
which is rather wide.
Excluding the results from the VAR model which are extremely variable and
often insignificant, the ranges for elasticities for other commodity groups are
as follows. For the Coal & Coke (B) sector, the estimated income elasticities
Commodity Group
Model
Type
A B C D E F G Total
Static 3.388** 0.108** 0.562** 0.924** 0.701** 0.159* 0.964* 1.467**
PA 3.289* 0.092 0.625* 0.981* 0.714** 0.051 2.406* 1.485**
ReADLM 3.289* - 0.728* 1.016** 0.701** - 2.788** 1.206**
VAR 2.961 0.058 0.316 0.248 0.707* 0.013 -2.659 1.279
TVP 1.569** 0.099 0.310* 0.892** 0.599** 0.296 0.761** 0.958**
STSM 0.862* 0.383* 0.528** 1.126** 0.897** 1.028** 0.628** 0.720**
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are dubiously low, ranging from 0.092 to 0.383. The ranges for Petrol &
Petroleum Products (C) and Construction (E) are relatively narrow: 0.310-
0.728 and 0.599-0.897 respectively. For the Metals & Ores sector (D), the
estimated elasticity values are close to 1, in the range 0.892-1.126. In the
case of Others (G), the range is wider, between 0.628 and 2.788. As far as
the total road plus rail freight demand is concerned, the range of the income
elasticity is from 0.720 to 1.485.
Close inspection of the data suggests that these elasticity estimates, whilst
informative, are likely to be contaminated with other trend effects. We made
many other attempts to disentangle these effects, but no better results were
obtained.
5.3 Ex Post Forecasting Comparison
The chosen models are used to generate forecasts of the GB road plus rail
freight demand for each commodity group, as well as for total road plus rail
freight demand, over the period 1999-2006. For each model, the recursive
forecasting technique is used to generate forecasts, i.e., the models are
estimated over the period 1974-1998 first, and the estimated models are used
to forecast road plus rail freight demand over the period 1999-2006.
Subsequently the models are re-estimated using the data from 1974 to 1999
and forecasts are generated for the period 2000-2006. Such a procedure is
repeated until all observations are exhausted. As a result, 8 one-year-ahead
forecasts, 6 three-year-ahead forecasts, and 4 five-year-ahead forecasts are
generated. The ex post forecasting performances of the models are evaluated
based on a measure of error magnitude: the mean absolute percentage error
(MAPE). MAPE is defined as
100
/

=
n
Y Y Y
MAPE
t
n
t
t t
(11)
where
t
Y

and
t
Y are respectively the forecast and actual values and n the
number of forecast observations. The smallest values of the MAPE indicate
the most accurate forecasts. The forecasting performances of the alternative
models are ranked based on MAPE and the results are reported in Table 8.
One-year-ahead forecasts
Table 8 shows that for one-year-ahead forecasts, the STSM is the most
accurate forecasting model in five out of the eight cases. The TVP model
performs best in two cases, followed by the Reduced ADLM and OLS
regression model for one case each (the Reduced ADLM model collapses to
the OLS regression model in the case of commodity group E). On the basis of
the number of occasions when each model is either the most accurate or the
second most accurate forecasting model, the STSM is ranked first followed by
the TVP model.

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Table 8 Forecasting Accuracy of Alternative Econometric Models based on MAPE
Forecast Horizon
Forecasting
Method ZKA ZKB ZKC ZKD ZKE ZKF ZKG ZKTOT
1-year-ahead OLS Regression 1.472%(6) 10.348%(6) 3.506%(5) 3.033%(4) 0.629%(1=) 7.125%(6) 4.916%(6) 0.963%(6)
PA 0.826%(2=) 8.904%(5) 3.016%(3) 2.021%(2) 0.699%(4) 5.192%(5) 0.525%(5) 0.321%(4=)
ReADLM 0.826%(2=) 8.678%(3) 3.502%(4) 2.067%(3) 0.629%(1=) 4.760%(4) 0.363%(3) 0.321%(4=)
VAR 0.958%(4) 8.784%(4) 2.974%(2) 3.103%(5) 0.841%(6) 4.728%(3) 0.327%(2) 0.290%(2)
TVP 0.750%(1) 6.360%(2) 3.537%(6) 1.996%(1) 0.778%(5) 4.511%(2) 0.489%(4) 0.291%(3)
STSM 0.994%(5) 6.056%(1) 2.686%(1) 3.258%(6) 0.678%(3) 4.404%(1) 0.304%(1) 0.211%(1)

3-year-ahead OLS Regression 1.241%(2) 15.385%(5) 3.491%(5) 3.252%(1) 0.351%(2=) 9.412%(6) 5.623%(6) 1.364%(6)
PA 1.331%(3=) 15.265%(4) 3.206%(4) 3.571%(2) 0.345%(1) 7.692%(4) 1.222%(5) 0.641%(2=)
ReADLM 1.331%(3=) 13.552%(3) 3.784%(6) 3.786%(3) 0.351%(2=) 6.151%(2) 0.759%(3) 0.641%(2=)
VAR 1.806%(5) 19.996%(6) 2.068%(2) 5.505%(5) 1.473%(6) 8.229%(5) 0.676%(2) 0.759%(5)
TVP 0.716%(1) 12.224%(2) 2.231%(3) 3.838%(4) 0.803%(5) 6.286%(3) 1.219%(4) 0.723%(4)
STSM 2.214%(6) 9.240%(1) 1.441%(1) 5.865%(6) 0.501%(4) 5.595%(1) 0.669%(1) 0.617%(1)

5-year-ahead OLS Regression 1.477%(2) 19.752%(5) 4.324%(5) 3.872%(1) 0.306%(2=) 11.654%(5) 6.433%(6) 1.752%(6)
PA 1.972%(3=) 19.643%(4) 4.041%(4) 4.177%(2) 0.265%(1) 10.555%(4) 2.027%(4) 0.793%(1=)
ReADLM 1.972%(3=) 17.804%(3) 4.632%(6) 4.757%(3) 0.306%(2=) 9.051%(3) 0.944%(1) 0.793%(1=)
VAR 3.207%(5) 31.903%(6) 2.148%(1) 7.131%(5) 3.094%(6) 11.732%(6) 1.286%(3) 0.908%(3)
TVP 0.987%(1) 16.679%(2) 3.671%(3) 5.999%(4) 1.040%(5) 8.630%(2) 2.049%(5) 1.226%(4)
STSM 3.641%(6) 11.169%(1) 2.759%(2) 9.757%(6) 0.331%(4) 7.981%(1) 1.035%(2) 1.254%(5)

Note: The figures in parentheses are rankings.
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The least accurate forecasting model is the traditional OLS regression model,
due to the fact that it performs worst in five out of the eight cases. The VAR
model, the STSM and the TVP model generate the least accurate forecasts in
one case each, but as stated above, the latter two otherwise perform well.
When the criterion is based on the number of occasions when each model is
either the least accurate or the second least accurate forecasting model,
again the OLS regression model exhibits the worst forecast performance,
followed by the PA model and the VAR model.
Three-year-ahead forecasts
At the three-year-ahead forecasting horizon, the STSM performs consistently
well, being ranked top in five out of the eight cases, whilst the TVP, PA and
OLS regression models generate the best forecasts in just one case each.
Based on the criterion of the most accurate or second most accurate
forecasting model, the STSM is still the best. It is difficult to differentiate
between the PA model, the reduced ADLM and the OLS regression models
on this basis, but as the PA model never generates the worst forecasts, it is
considered to be the second best forecasting model following the STSM. The
OLS regression model is ranked bottom in three cases, followed by the VAR
model and STSM in two cases each. The PA and ReADLM models are each
better than the STSM model for three out of the seven commodity groups, and
close for the total. Despite the fact that the STSM is ranked bottom in two
cases, it is still considered the best performing model as it generates the most
accurate forecasts in most of the cases. When the criterion is the least
accurate or second least accurate forecasting model, the VAR model seems
to be the worst performing model followed by the OLS regression model.
Five-year-ahead forecasts
For five-year-ahead forecasts, the PA model, the reduced ADLM and STSM
each generate the most accurate forecasts in two out of the eight cases.
According to the most accurate or second most accurate criterion, the STSM
is in the lead (four cases), followed by the PA model and reduced ADLM
(three cases each). However, the STSM is ranked bottom twice and the
reduced ADLM generates the least accurate forecasts once, whereas the rank
of the PA model never drops below fourth place. It can be concluded that the
PA model is the best performing model for five-year-ahead horizon, followed
by the STSM and the reduced ADLM.
As far as the least accurate forecasting model is concerned, the VAR model
performs worst in three cases, followed by the OLS model and STSM in two
cases. If the criterion is the least accurate or second least accurate
forecasting model, the VAR model and the OLS regression model are ranked
equal. On the basis that the VAR model is ranked bottom more often than the
OLS regression model, the VAR model could be considered the worst
performing model for five-year-ahead horizons.
As might be expected, MAPE shows a tendency to rise as the forecast
horizon increases. This can be seen for example in the case of total road and
rail freight (the final column in Table 8). Moreover, the MAPE for the PA and
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ReADLM models tends to rise less quickly than for the other model forms. We
concluded that for long-term (i.e. 5+ years) forecasts, the PA or its
generalisation ReADLM are to be preferred.
6. CONCLUSIONS
In this study, six econometric time series models have been applied to
modelling and forecasting the road plus rail freight demand in GB, based on
annual time series data for the period 1974-2006. These models comprise:
the traditional OLS regression model, the PA model, the reduced ADLM, the
unrestricted VAR model, the TVP model and the STSM. The empirical
analysis is carried out at both aggregate and disaggregate levels. The relative
forecasting accuracy of alternative models has been evaluated based on
MAPE in the context of freight demand.
The estimation results show that industrial production generally offers a good
explanation of road plus rail freight demand in GB. However, the sensitivity of
road plus rail freight demand to the change in the industrial production varies
across different commodity groups, as different commodities have different
transport requirements and each estimate reflects particular circumstances for
each commodity group. The actual magnitudes of income elasticity estimates
also vary due to the different models estimated. The ranges of estimated
income elasticity for different sectors have been provided. This information will
be valuable for transport planners and policy makers.
The forecasting performance comparison results show that no single model
outperforms the others in all situations. Overall, it can be concluded that for
short-term (one-year-ahead) forecasting, the STSM is the best forecasting
model, followed by the TVP model. For medium-term (three-year-ahead)
forecasting the STSM is superior to its competing models, followed by the PA
model. For relatively longer horizons (five-year-ahead in this study), the PA
model and reduced ADLM seem to perform best although the STSM is not far
behind. Forecasting horizons do seem to have an effect on the forecasting
performance of different models. The STSM seems to perform better for short
to medium term horizons, whereas the PA model outperforms others for
longer term horizons. The TVP model generally performs better in the short-
term (one-year-ahead) than for longer-term forecasting. This gives the policy
makers useful information when they need to choose between different
forecasting tools.


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