Title: To pool or not to pool: Looking for a good strategy for parameter estimation and forecasting in panel regressions
Authors: Wendun Wang - Erasmus University Rotterdam (Netherlands) [presenting]
Xinyu Zhang - Academy of Mathematics and Systems Science, Chinese Academy of Sciences (China)
Richard Paap - Erasmus University Rotterdam (The Netherlands)
Abstract: The focus is on estimating the slope parameters in potentially heterogeneous panel data regressions for explaining and forecasting cross-country sovereign credit risk. We propose a novel optimal pooling averaging estimator that makes an explicit trade-off between efficiency gains from pooling and bias due to heterogeneity. By theoretically and numerically comparing various estimators, we find that a uniformly best estimator does not exist and that our new estimator is superior in non-extreme cases. The results provide practical guidance for the best estimator depending on features of data and models.