I'm having troubles choosing which approach to adopt when trying to forecast daily time series while taking into consideration special days like weekends and national holidays. The two methods I'm familiar with are :
Method 1 : using dummy variables to separate normal days from special days. Method 2 : separate normal days from special days and forecast each time series separately.
The first method seems the most intuitive and natural to me but it performs badly when the difference between normal days and special days is huge .. For instance when we have null values in the weekends. Furthermore, to implement this method in R I use the xreg attribute in ARIMA, but I don't know how to include dummy variables for other models like : ETS, STRUCTURAL, BATS & TBATS, THETA.
The second method seems too simple since it assumes that we have no relationship whatsoever between special days and normal days which is not the case in most cases.
So I'd like to know is there an other approach(s) I'm not aware of? If not, is there a way to improve those two methods? How can use dummy variables for models other than ARIMA in R? Which method do you recommend?
Any thought, advice or guidance would be greatly appreciated .