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The Properties of Model Selection when Retaining Theory Variables

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  • David F. Hendry

    (Economics Department and Institute for New Economic Thinking at the Oxford Martin School, University of Oxford, UK)

  • Søren Johansen

    (Economics Department, University of Copenhagen and CREATES, Aarhus University, Denmark)

Abstract

Economic theories are often fitted directly to data to avoid possible model selection biases. We show that embedding a theory model that specifies the correct set of m relevant exogenous variables, x{t}, within the larger set of m+k candidate variables, (x{t},w{t}), then selection over the second set by their statistical significance can be undertaken without affecting the estimator distribution of the theory parameters. This strategy returns the theory-parameter estimates when the theory is correct, yet protects against the theory being under-specified because some w{t} are relevant.

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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 11-25.

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Length: 5 pages
Date of creation: 24 Oct 2011
Date of revision:
Handle: RePEc:kud:kuiedp:1125

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Keywords: Model selection; theory retention;

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  1. David F. Hendry & Hans-Martin Krolzig, 2005. "The Properties of Automatic "GETS" Modelling," Economic Journal, Royal Economic Society, vol. 115(502), pages C32-C61, 03.
  2. David Hendry & Carlos Santos, 2010. "An Automatic Test of Super Exogeneity," Economics Series Working Papers 476, University of Oxford, Department of Economics.
  3. Lovell, Michael C, 1983. "Data Mining," The Review of Economics and Statistics, MIT Press, vol. 65(1), pages 1-12, February.
  4. Søren Johansen & Bent Nielsen, 2008. "An analysis of the indicator saturation estimator as a robust regression," Discussion Papers 08-03, University of Copenhagen. Department of Economics.
  5. Castle Jennifer L. & Doornik Jurgen A & Hendry David F., 2011. "Evaluating Automatic Model Selection," Journal of Time Series Econometrics, De Gruyter, vol. 3(1), pages 1-33, February.
  6. Hendry, David F., 2011. "On adding over-identifying instrumental variables to simultaneous equations," Economics Letters, Elsevier, vol. 111(1), pages 68-70, April.
  7. Wu, De-Min, 1973. "Alternative Tests of Independence Between Stochastic Regressors and Disturbances," Econometrica, Econometric Society, vol. 41(4), pages 733-50, July.
  8. Leeb, Hannes & P tscher, Benedikt M., 2005. "Model Selection And Inference: Facts And Fiction," Econometric Theory, Cambridge University Press, vol. 21(01), pages 21-59, February.
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