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Econometric Modelling of Time Series with Outlying Observations

  • Hendry David F

    (University of Oxford)

  • Mizon Grayham E

    (University of Southampton)

Economies are buffeted by natural shocks, wars, policy changes, and other unanticipated events. Observed data can be subject to substantial revisions. Consequently, a “correct” theory can manifest serious mis-specification if just fitted to data ignoring its time-series characteristics. Modelling U.S. expenditure on food, the simplest theory implementation fails to describe the evidence. Embedding that theory in a general framework with dynamics, outliers and structural breaks and using impulse-indicator saturation, the selected model performs well, despite commencing with more variables than observations (see Doornik, 2009b), producing useful robust forecasts. Although this illustration involves a simple theory, the implications are generic and apply to sophisticated theories.

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Article provided by De Gruyter in its journal Journal of Time Series Econometrics.

Volume (Year): 3 (2011)
Issue (Month): 1 (February)
Pages: 1-26

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Handle: RePEc:bpj:jtsmet:v:3:y:2011:i:1:n:6
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