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Forecasting using heterogeneous panels with cross-sectional dependence

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  • Akgun, Oguzhan
  • Pirotte, Alain
  • Urga, Giovanni

Abstract

In this paper, we focus on forecasting methods that use heterogeneous panels in the presence of cross-sectional dependence in terms of both spatial error dependence and common factors. We propose two main approaches to estimating the factor structure: a residuals-based approach, and an approach that uses a panel of auxiliary variables to extract the factors. Small sample properties of the proposed methods are investigated through Monte Carlo simulations and applied to predict house price inflation in OECD countries.

Suggested Citation

  • Akgun, Oguzhan & Pirotte, Alain & Urga, Giovanni, 2020. "Forecasting using heterogeneous panels with cross-sectional dependence," International Journal of Forecasting, Elsevier, vol. 36(4), pages 1211-1227.
    • Handle: RePEc:eee:intfor:v:36:y:2020:i:4:p:1211-1227
    DOI: 10.1016/j.ijforecast.2019.11.007
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