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Regression Models with Data-based Indicator Variables

  • David F. Hendry
  • Carlos Santos

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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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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  1. 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.
  2. Clements,Michael & Hendry,David, 1998. "Forecasting Economic Time Series," Cambridge Books, Cambridge University Press, number 9780521632423.
  3. Doornik, Jurgen A & Hendry, David F & Nielsen, Bent, 1998. " Inference in Cointegrating Models: UK M1 Revisited," Journal of Economic Surveys, Wiley Blackwell, vol. 12(5), pages 533-72, December.
  4. Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, number 9780198283164, March.
  5. Salkever, David S., 1976. "The use of dummy variables to compute predictions, prediction errors, and confidence intervals," Journal of Econometrics, Elsevier, vol. 4(4), pages 393-397, November.
  6. Hendry, David F, 1980. "Econometrics-Alchemy or Science?," Economica, London School of Economics and Political Science, vol. 47(188), pages 387-406, November.
  7. 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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