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Model selection in under-specified equations facing breaks

  • Castle, Jennifer L.
  • Hendry, David F.

When a model under-specifies the data generation process, model selection can improve over estimating a prior specification, especially if location shifts occur. Impulse-indicator saturation (IIS) can ‘correct’ non-constant intercepts induced by location shifts in omitted variables, which leave slope parameters unaltered even when correlated with included variables. Location shifts in included variables induce changes in estimated slopes when there are correlated omitted variables. IIS helps mitigate the adverse impacts of induced location shifts on non-constant intercepts and estimated standard errors, and can provide an automatic intercept correction to improve forecasts following location shifts.

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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 178 (2014)
Issue (Month): P2 ()
Pages: 286-293

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Handle: RePEc:eee:econom:v:178:y:2014:i:p2:p:286-293
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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  1. Castle, Jennifer L. & Doornik, Jurgen A. & Hendry, David F., 2012. "Model selection when there are multiple breaks," Journal of Econometrics, Elsevier, vol. 169(2), pages 239-246.
  2. Engle, Robert F. & Hendry, David F., 1993. "Testing superexogeneity and invariance in regression models," Journal of Econometrics, Elsevier, vol. 56(1-2), pages 119-139, March.
  3. Granger, Clive W.J. & Hendry, David F., 2005. "A Dialogue Concerning A New Instrument For Econometric Modeling," Econometric Theory, Cambridge University Press, vol. 21(01), pages 278-297, February.
  4. 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.
  5. Hendry, David F., 1979. "The behaviour of inconsistent instrumental variables estimators in dynamic systems with autocorrelated errors," Journal of Econometrics, Elsevier, vol. 9(3), pages 295-314, February.
  6. Jennifer Castle & David Hendry & Jurgen A. Doornik, 2010. "Evaluating Automatic Model Selection," Economics Series Working Papers 474, University of Oxford, Department of Economics.
  7. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  8. David Hendry & Jurgen A. Doornik & Felix Pretis, 2013. "Step-indicator Saturation," Economics Series Working Papers 658, University of Oxford, Department of Economics.
  9. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche 9552, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  10. David Hendry & Søren Johansen & Carlos Santos, 2008. "Automatic selection of indicators in a fully saturated regression," Computational Statistics, Springer, vol. 23(2), pages 337-339, April.
  11. Christophe Bontemps & Grayham E. Mizon, 2008. "Encompassing: Concepts and Implementation," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 70(s1), pages 721-750, December.
  12. David Hendry & Carlos Santos, 2010. "An Automatic Test of Super Exogeneity," Economics Series Working Papers 476, University of Oxford, Department of Economics.
  13. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, vol. 59(3), pages 817-58, May.
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