An Empirical Study about GDP growth and Sovereign Credit Risk using Mallow’s Pooling Average

In this paper, we investigate the effect of heterogeneous slope parameters on a linear regression over panel data. As a result of this heterogeneity, we propose pooling averaging estimator to make a trade-off between bias and efficiency gains. We apply the Mallow’s Pooling Averaging (MPA) method to pick the optimal weights for our pooling averaging estimation. Furthermore, we apply this model in practice to study the relationship between cross-country sovereign credit risk and GDP growth from both an estimation and forecasting performance perspective.