Optimal forecasting with heterogeneous panels: a Monte Carlo study

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Lorenzo Trapani ; Giovanni Urga (2006)
  • Publisher: Università degli studi di Bergamo
  • Related identifiers: doi: 10.1016/j.ijforecast.2009.02.001
  • Subject: Panel data; homogeneous, heterogeneous and shrinkage estimators; forecasting; cross dependence; Monte Carlo simulations; | Panel data; homogeneous, heterogeneous and shrinkage estimators; forecasting; cross dependence; Monte Carlo simulations. | HG
    • jel: jel:C23

This paper reports the results of a series of Monte Carlo exercises to contrast the forecasting performance of several panel data esti- mators, divided into three main groups (homogeneous, heterogeneous and shrinkage/Bayesian). The comparison is done using di¤erent lev- els of heterogeneity, alternative panel structures in terms of T and N and using various error dynamics speci.cations. We also consider the presence of various degrees of cross sectional dependence among units. To assess the predictive performance, we use traditional measures of forecast accuracy (Theil.s U statistics, RMSE and MAE), the Diebold and Mariano.s (1995) test, and the Pesaran and Timmerman.s (1992) statistics on the capability of forecasting turning points. The main .nding of our analysis is that in presence of heterogeneous panels the Bayesian procedures have systematically the best predictive power in- dependently of the model.s features.
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