Practitioners are generally well aware of the fact that most standard approaches for estimation and inference in panel data regressions are based on assuming that the cross-sectional units are independent of each other, an assumption that is surely mistaken in applications, especially in macroeconomics and finance. Yet, applications involving anything but these standard approaches are very rare. The current paper can be seen as a reaction to this. The purpose is to point to some of the recent advances in the area of factor-augmented panel regressions, and to also provide some guidance regarding their implementation.
Westerlund, J., & Urbain, J. R. Y. J. (2013). On the implementation and use of factor-augmented regressions in panel data. Journal of Asian Economics, 28, 3-11. https://doi.org/10.1016/j.asieco.2013.02.002