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Data mining reconsidered: encompassing and the general-to-specific approach to specification search

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  • KEVIN D. HOOVER
  • STEPHEN J. PEREZ

Abstract

This paper examines the efficacy of the general-to-specific modeling approach associated with the LSE school of econometrics using a simulation framework. A mechanical algorithm is developed which mimics some aspects of the search procedures used by LSE practitioners. The algorithm is tested using 1000 replications of each of nine regression models and a data set patterned after Lovell's (1983) study of data mining. The algorithm is assessed for its ability to recover the data-generating process. Monte Carlo estimates of the size and power of exclusion tests based on t -statistics for individual variables in the specification are also provided. The roles of alternative sizes for specification tests in the algorithm, the consequences of different signal-to-noise ratios, and strategies for reducing overparameterization are also investigated. The results are largely favorable to the general-to-specific approach. In particular, the size of exclusion tests remains close to the nominal size used in the algorithm despite extensive search.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Econometrics Journal.

Volume (Year): 2 (1999)
Issue (Month): 2 ()
Pages: 167-191

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Handle: RePEc:ect:emjrnl:v:2:y:1999:i:2:p:167-191

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Keywords: General-to-specific; Encompassing; Data mining; LSE econometrics.;

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