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Unit Averaging for Heterogeneous Panels

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  • Christian Brownlees
  • Vladislav Morozov

Abstract

In this work we introduce a unit averaging procedure to efficiently recover unit-specific parameters in a heterogeneous panel model. The procedure consists in estimating the parameter of a given unit using a weighted average of all the unit-specific parameter estimators in the panel. The weights of the average are determined by minimizing an MSE criterion. We analyze the properties of the minimum MSE unit averaging estimator in a local heterogeneity framework inspired by the literature on frequentist model averaging. The analysis of the estimator covers both the cases in which the cross-sectional dimension of the panel is fixed and large. In both cases, we obtain the local asymptotic distribution of the minimum MSE unit averaging estimators and of the associated weights. A GDP nowcasting application for a panel of European countries showcases the benefits of the procedure.

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  • Christian Brownlees & Vladislav Morozov, 2022. "Unit Averaging for Heterogeneous Panels," Papers 2210.14205, arXiv.org, revised Nov 2022.
    • Handle: RePEc:arx:papers:2210.14205
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