Forecasting With Dynamic Panel Data Models

DOI10.3982/ECTA14952MaRDI QIDQ4992085zbMATH OpenOpenAlexFDO

Authors Laura Liu, Hyungsik Roger Moon, Frank Schorfheide

Publication date 7 June 2021

Published in Econometrica (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1709.10193

zbMATH Keywords

bank stress testsempirical Bayesforecastingpanel dataratio optimalityTweedie's formula

Mathematics Subject Classification ID

Causal inference from observational studies (62D20) Inference from stochastic processes and prediction (62M20) Applications of statistics to economics (62P20)

Abstract: This paper considers the problem of forecasting a collection of short time series using cross sectional information in panel data. We construct point predictors using Tweedie's formula for the posterior mean of heterogeneous coefficients under a correlated random effects distribution. This formula utilizes cross-sectional information to transform the unit-specific (quasi) maximum likelihood estimator into an approximation of the posterior mean under a prior distribution that equals the population distribution of the random coefficients. We show that the risk of a predictor based on a non-parametric estimate of the Tweedie correction is asymptotically equivalent to the risk of a predictor that treats the correlated-random-effects distribution as known (ratio-optimality). Our empirical Bayes predictor performs well compared to various competitors in a Monte Carlo study. In an empirical application we use the predictor to forecast revenues for a large panel of bank holding companies and compare forecasts that condition on actual and severely adverse macroeconomic conditions.

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