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Simulation based selection of competing structural econometric models

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  • Tong Li

    (Institute for Fiscal Studies and Vanderbilt University)

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    Abstract

    This paper proposes a formal model selection test for choosing between two competing structural econometric models. The procedure is based on a novel lack-of-fit criterion, namely, the simulated mean squared error of predictions (SMSEP), taking into account the complexity of structural econometric models. It is asymptotically valid for any fixed number of simulations, and allows for any estimator which has a vn asymptotic normality or is superconsistent with a rate at n. The test is bi-directional and applicable to non-nested models which are both possibly misspecified. The asymptotic distribution of the test statistic is derived. The proposed test is general regardless of whether the optimization criteria for estimation of competing models are the same as the SMSEP criterion used for model selection. An empirical application using timber auction data from Oregon is used to illustrate the usefulness and generality of the proposed testing procedure.

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    File URL: http://cemmap.ifs.org.uk/wps/cwp1606.pdf
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    Bibliographic Info

    Paper provided by Centre for Microdata Methods and Practice, Institute for Fiscal Studies in its series CeMMAP working papers with number CWP16/06.

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    Length: 29 pp
    Date of creation: Aug 2006
    Date of revision:
    Handle: RePEc:ifs:cemmap:16/06

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    Related research

    Keywords: Lack-of-fit; Model selection tests; Non-nested models; Simulated mean squared error of predictions;

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    References

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    8. repec:cup:etheor:v:12:y:1996:i:3:p:517-67 is not listed on IDEAS
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    12. Wooldridge, Jeffrey M., 1990. "An encompassing approach to conditional mean tests with applications to testing nonnested hypotheses," Journal of Econometrics, Elsevier, vol. 45(3), pages 331-350.
    13. Li, Tong & Vuong, Quang, 1997. "Using all bids in parametric estimation of first-price auctions," Economics Letters, Elsevier, vol. 55(3), pages 321-325, September.
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    19. Donald, Stephen G & Paarsch, Harry J, 1993. "Piecewise Pseudo-maximum Likelihood Estimation in Empirical Models of Auctions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(1), pages 121-48, February.
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    21. Smith, Richard J, 1992. "Non-nested.Tests for Competing Models Estimated by Generalized Method of Moments," Econometrica, Econometric Society, vol. 60(4), pages 973-80, July.
    22. Donald, Stephen G. & Paarsch, Harry J., 1996. "Identification, Estimation, and Testing in Parametric Empirical Models of Auctions within the Independent Private Values Paradigm," Econometric Theory, Cambridge University Press, vol. 12(03), pages 517-567, August.
    23. Tong Li, 2005. "Econometrics of first-price auctions with entry and binding reservation prices," Journal of Econometrics, Elsevier, vol. 126(1), pages 173-200, May.
    24. repec:cup:etheor:v:12:y:1996:i:4:p:657-81 is not listed on IDEAS
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