Forecasting with Dynamic Pane Data Models

95 Pages Posted: 31 Jan 2017

See all articles by Laura Liu

Laura Liu

Indiana University Bloomington - Department of Economics

Hyungsik Roger Moon

University of Southern California - Department of Economics; USC Dornsife Institute for New Economic Thinking

Frank Schorfheide

University of Pennsylvania - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); University of Pennsylvania - The Penn Institute for Economic Research (PIER)

Date Written: December 21, 2016

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 coeffcients under a correlated random effects distribution. This formula utilizes cross-sectional information to transform the unit-speciffc (quasi) maximum likelihood estimator into an approximation of the posterior mean under a prior distribution that equals the population distribution of the random coeffcients. 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.

Keywords: Bank Stress Tests, Empirical Bayes, Forecasting, Panel Data, Ratio Optimality, Tweedies Formula

JEL Classification: C11, C14, C23, C53, G21

Suggested Citation

Liu, Laura and Moon, Hyungsik Roger and Schorfheide, Frank, Forecasting with Dynamic Pane Data Models (December 21, 2016). USC-INET Research Paper No. 17-02, Available at SSRN: https://ssrn.com/abstract=2908529 or http://dx.doi.org/10.2139/ssrn.2908529

Laura Liu (Contact Author)

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States

HOME PAGE: http://https://laurayuliu.com/

Hyungsik Roger Moon

University of Southern California - Department of Economics ( email )

KAP 300
Los Angeles, CA 90089-0253
United States
213-740-2108 (Phone)
213-740-8543 (Fax)

USC Dornsife Institute for New Economic Thinking ( email )

3620 S. Vermont Avenue, KAP 364F
Los Angeles, CA 90089-0253
United States

Frank Schorfheide

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

HOME PAGE: http://www.econ.upenn.edu/~schorf

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Pennsylvania - The Penn Institute for Economic Research (PIER) ( email )

Philadelphia, PA
United States

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