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Regression Models with Data-based Indicator Variables

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David F. Hendry
Carlos Santos

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Abstract

Ordinary least squares estimation of an impulse-indicator coefficient is inconsistent, but its variance can be consistently estimated. Although the ratio of the inconsistent estimator to its standard error has a "t"-distribution, that test is inconsistent: one solution is to form an index of indicators. We provide Monte Carlo evidence that including a plethora of indicators need not distort model selection, permitting the use of many dummies in a general-to-specific framework. Although White's (1980) heteroskedasticity test is incorrectly sized in that context, we suggest an easy alteration. Finally, a possible modification to impulse 'intercept corrections' is considered. Copyright 2005 Blackwell Publishing Ltd.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0084.2005.00132.x
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Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics & Statistics.

Volume (Year): 67 (2005)
Issue (Month): 5 (October)
Pages: 571-595
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Handle: RePEc:bla:obuest:v:67:y:2005:i:5:p:571-595

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Heino Bohn Nielsen, 2003. "Cointegration Analysis in the Presence of Outliers," Discussion Papers 03-05, University of Copenhagen. Department of Economics. [Downloadable!]
  2. Hendry, David F, 1980. "Econometrics-Alchemy or Science?," Economica, London School of Economics and Political Science, vol. 47(188), pages 387-406, November. [Downloadable!] (restricted)
  3. Doornik, Jurgen A & Hendry, David F & Nielsen, Bent, 1998. " Inference in Cointegrating Models: UK M1 Revisited," Journal of Economic Surveys, Blackwell Publishing, vol. 12(5), pages 533-72, December. [Downloadable!] (restricted)
  4. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May. [Downloadable!] (restricted)
  5. Messer, Karen & White, Halbert, 1984. "A Note on Computing the Heteroskedasticity Consistent Covariance Matrix Using Instrumental Variable Techniques," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 46(2), pages 181-84, May.
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  1. Søren Johansen & David F. Hendry & Carlos Santos, 2007. "Selecting a Regression Saturated by Indicators," CREATES Research Papers 2007-36, School of Economics and Management, University of Aarhus. [Downloadable!]
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  2. SANTOS, Carlos & OLIVEIRA, Maria Alberta, 2007. "Modelling The German Yield Curve And Testing The Lucas Critique, 1975-2001," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 7(1). [Downloadable!] (restricted)
  3. Carlos Santos & David Hendry & Soren Johansen, 2008. "Automatic selection of indicators in a fully saturated regression," Computational Statistics, Springer, vol. 23(2), pages 317-335, April. [Downloadable!] (restricted)
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  4. Guglielmo Maria Caporale & Roman Matousek & Chris Stewart, 2009. "Rating Assignments: Lessons from International Banks," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  5. Jennifer L. Castle & Nicholas W.P. Fawcett & David F. Hendry, 2008. "Forecasting with Equilibrium-correction Models during Structural Breaks," Economics Series Working Papers 408, University of Oxford, Department of Economics. [Downloadable!]
  6. Jennifer L. Castle & David F. Hendry, 2008. "The Long-Run Determinants of UK Wages, 1860-2004," Economics Series Working Papers 409, University of Oxford, Department of Economics. [Downloadable!]
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