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Regression Models with Data-based Indicator Variables

  • David F. Hendry

    ()

    (Economcis Department, University of Oxford)

  • Carlos Santos

    ()

    (Economics Department, University of Oxford)

OLS 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 improvement. Finally, a possible modification to impulse intercept corrections is considered.

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File URL: http://www.nuff.ox.ac.uk/economics/papers/2004/w13/CSDFHindicators03a.pdf
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Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2004-W13.

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Length: 18 pages
Date of creation: 03 Nov 2004
Date of revision:
Handle: RePEc:nuf:econwp:0413
Contact details of provider: Web page: http://www.nuff.ox.ac.uk/economics/

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  1. 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.
  2. Hendry, David F, 1980. "Econometrics-Alchemy or Science?," Economica, London School of Economics and Political Science, vol. 47(188), pages 387-406, November.
  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. repec:cup:cbooks:9780521634809 is not listed on IDEAS
  5. 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.
  6. 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.
  7. Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, number 9780198283164, March.
  8. repec:cup:cbooks:9780521632423 is not listed on IDEAS
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