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Lessons in Econometric Methodology: The Axiom of Correct Specification

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  • Asad Zaman

    (International Institute of Islamic Economic, International Islamic University of Islamabad)

Abstract

Leamer first pointed out that a regression model is valid only if all of the assumptions under which it is constructed are valid. In particular, this means that all of relevant regressors which are determinants must be included. In practice, applied econometricians assume that whatever model they put is valid, when there can only be one valid model. If any relevant regressor is omitted, then the equation is mis-specified and conclusions drawn from the regression can be seriously misleading. Even though this mis-specification analysis is included in textbooks, it is routinely ignored in applications, where researcher interpret their equations as if they have correctly specified all regressors, without testing to see if this may be the cases. Hendry’s encompassing methodology provides a remedy for this problem, but seems to be unfamiliar to many. The purpose of this pedagogical note is to provide an introduction to an elementary but important aspect of this methodology.

Suggested Citation

  • Asad Zaman, 2017. "Lessons in Econometric Methodology: The Axiom of Correct Specification," International Econometric Review (IER), Econometric Research Association, vol. 9(2), pages 50-68, September.
    • Handle: RePEc:erh:journl:v:9:y:2017:i:2:p:50-68
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    References listed on IDEAS

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    1. Kevin D. Hoover & Stephen J. Perez, 1999. "Data mining reconsidered: encompassing and the general-to-specific approach to specification search," Econometrics Journal, Royal Economic Society, vol. 2(2), pages 167-191.
    2. David F. Hendry & Hans-Martin Krolzig, 2004. "We Ran One Regression," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(5), pages 799-810, December.
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    Cited by:

    1. Asad Zaman & Taseer Salahuddin, 2020. "Models and Reality: How Did Models Divorced from Reality Become Epistemologically Acceptable?," International Econometric Review (IER), Econometric Research Association, vol. 12(1), pages 50-74, April.

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    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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