Re: [Gretl-users] The "fcast" command and panel data

On Tue, 26 Feb 2019, Sven Schreiber wrote: > Am 26.02.2019 um 20:06 schrieb Allin Cottrell: >> BTW, I see that Stata is very restrictive in this department. With >> "predict" after "xtreg" you can't get an out of sample forecast even >> in the time dimension when no time dummies are present -- other than >> plain "xb" which omits individual effects, whether fixed or random. > > Well for small-T (standard micro panel assumption) the unit effects > are not well estimated, are they? That might be the reason they ban > it. (And probably a good reason.)

But whatever Stata's up to, it's worth assessing whether individual fixed effects estimated with small T are actually any use in forecasting out of sample in the time dimension. I show below a Monte Carlo experiment, comparing out-of-sample MSE for forecasts computed with and without individual effects. (In the "without" case I use the global constant, as in Stata's "xb" forecast for fixed effects.) I simulate 100 individuals observed over T periods, T-1 of which are used in estimation leaving the last for an out-of-sample forecast, with T = 4 as baseline. Executive summary: As Sven suggests, if T is small enough (and the fixed effects are moderate in size, even if statistically significant at the usual level on a joint test), then the estimated effects are just noise so far as forecasting is concerned; the forecast MSE tends to be smaller without them. But if T is a bit larger (even just 5 as opposed to the 4 in the script), or if the scale of the fixed effects passes a certain threshold[*], then inclusion of the estimated fixed effects enhances the forecast accuracy quite substantially.