Regression Models with Data-based Indicator Variables
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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- Jurgen A. Doornik & David F. Hendry & Bent Nielsen, 1998.
"Inference in Cointegrating Models: UK M1 Revisited,"
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