Estimation and Validation Periods

It is often useful to divide your time series into an estimation, or historical, period and a validation period. You develop a model on the basis of the observations in the estimation (historical) period and then test it to see how well it works in the validation period. By forcing the model to make predictions for points you already know (the points in the validation period), you get an idea of how well the model does at forecasting.

The cases in the validation period are typically referred to as holdout cases because they are held-back from the model-building process. Once you're satisfied that the model does an adequate job of forecasting, you can redefine the estimation period to include the holdout cases, and then build your final model.