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Simulation based selection of competing structural econometric models

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Author Info
Tong Li (Institute for Fiscal Studies and Vanderbilt University)
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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Publisher 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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Postal: The Institute for Fiscal Studies 7 Ridgmount Street LONDON WC1E 7AE
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Postal: The Institute for Fiscal Studies 7 Ridgmount Street LONDON WC1E 7AE
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Related research
Keywords: Lack-of-fit; Model selection tests; Non-nested models; Simulated mean squared error of predictions;

Find related papers by JEL classification:
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing

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References listed on IDEAS
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    Other versions:
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  13. 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. [Downloadable!]
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    Other versions:
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  17. Laffont, Jean-Jacques & Maskin, Eric S, 1990. "The Efficient Market Hypothesis and Insider Trading on the Stock Market," Journal of Political Economy, University of Chicago Press, vol. 98(1), pages 70-93, February. [Downloadable!] (restricted)
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  20. repec:cup:etheor:v:12:y:1996:i:4:p:657-81 is not listed on IDEAS
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  24. Gourieroux, C. & Monfort, A., 1986. "Testing non-nested hypotheses," Handbook of Econometrics, in: R. F. Engle & D. McFadden (ed.), Handbook of Econometrics, edition 1, volume 4, chapter 44, pages 2583-2637 Elsevier. [Downloadable!] (restricted)
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