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The Properties of Model Selection when Retaining Theory Variables

  • 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)

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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File URL: http://www.econ.ku.dk/english/research/publications/wp/dp_2011/1125.pdf
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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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  1. David Hendry & Hans-Martin Krolzig, 2003. "The Properties of Automatic Gets Modelling," Economics Papers 2003-W14, Economics Group, Nuffield College, University of Oxford.
  2. David Hendry & Carlos Santos, 2010. "An Automatic Test of Super Exogeneity," Economics Series Working Papers 476, University of Oxford, Department of Economics.
  3. David Hendry & Hans-Martin Krolzig, 2003. "The Properties of Automatic Gets Modelling," Economics Series Working Papers 2003-W14, University of Oxford, Department of Economics.
  4. Hendry, David F., 2011. "On adding over-identifying instrumental variables to simultaneous equations," Economics Letters, Elsevier, vol. 111(1), pages 68-70, April.
  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. 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.
  7. Lovell, Michael C, 1983. "Data Mining," The Review of Economics and Statistics, MIT Press, vol. 65(1), pages 1-12, February.
  8. 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.
  9. Wu, De-Min, 1973. "Alternative Tests of Independence Between Stochastic Regressors and Disturbances," Econometrica, Econometric Society, vol. 41(4), pages 733-50, July.
  10. Jennifer Castle & David Hendry & Jurgen A. Doornik, 2010. "Evaluating Automatic Model Selection," Economics Series Working Papers 474, University of Oxford, Department of Economics.
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