In the past advanced motion compensation techniques have been introduced leading to improved temporal predictions in hybrid video coding schemes. The focus of this paper is on grid-based warping prediction. The advantage of this technique compared to the commonly used block translational motion compensation is its improved capability to handle non-translational motion. However, a disadvantage is its 2-dimensional interdependency of motion vectors. This can lead to poor predictions, if the dependencies are not considered during the motion estimation process. Therefore in this paper a new highly efficient motion estimation method for grid-based prediction is presented. Different means are developed to improve the prediction quality, to decrease the computational complexity and to enhance the robustness of the algorithm. By introducing a hierarchical iterative octagonal matching with spatial and temporal prediction of candidate vectors for the motion search into a wavelet-based hybrid video coder a coding gain of up to 1.5 dB compared to MPEG-4 can be achieved.