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A Multicriteria Approach to Model Specification and Estimation

Author

Listed:
  • Robert Kalaba

    (Departments of Electrical and Biomedical Engineering, Univ. of Southern Cal.)

  • Leigh Tesfatsion

    (Department of Economics and Department of Mathematics, Iowa State Univ.)

Abstract

In decision theory, incommensurabilities among conflicting decision criteria are typically handled by multicriteria optimization methods such as Pareto efficiency and mean-variance analysis. In econometrics and statistics, where conflicting model criteria replace conflicting decision criteria, probability assessments are routinely used to transform disparate model discrepancy terms into apparently commensurable quantities. This tactic has both strengths and weaknesses. On the plus side, it permits the construction of a single real-valued measure of theory and data incompatibility in the form of a likelihood function or a posterior probability distribution. On the minus side, the amalgamation of conceptually distinct model discrepancy terms into a single real-valued incompatibility measure can make it difficult to untangle the true source of any diagnosed model specification problem. This paper discusses recent theoretical and empirical work on a multicriteria ``flexible least squares'' (FLS) approach to model specification and estimation. The basic FLS objective is to determine the ``cost-efficient frontier,'' that is, the set of estimates that are minimally incompatible with a specified set of model criteria. The relation of this work to previous work in econometrics, statistics, and systems science is also clarified.

Suggested Citation

  • Robert Kalaba & Leigh Tesfatsion, 1995. "A Multicriteria Approach to Model Specification and Estimation," Econometrics 9501001, EconWPA.
  • Handle: RePEc:wpa:wuwpem:9501001
    Note: 28 pages, all in LaTeX; Two additional figures available from the second author upon request.
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    References listed on IDEAS

    as
    1. Tesfatsion, Leigh & Veitch, John M., 1990. "U.S. money demand instability A flexible least squares approach," Journal of Economic Dynamics and Control, Elsevier, vol. 14(1), pages 151-173, February.
    2. Kalaba, Robert E. & Tesfatsion, Leigh S., 1980. "A Least-Squares Model Specification Test for a Class of Dynamic Nonlinear Economic Models With Systematically Varying Parameters," Staff General Research Papers Archive 11222, Iowa State University, Department of Economics.
    3. Kalaba, R. & Tesfatsion, L., 1988. "An Organizing Principle For Dynamic Estimation," Papers m8818, Southern California - Department of Economics.
    4. Kalaba, Robert & Tesfatsion, Leigh, 1988. "The flexible least squares approach to time-varying linear regression," Journal of Economic Dynamics and Control, Elsevier, vol. 12(1), pages 43-48, March.
    5. Korhonen, Pekka & Moskowitz, Herbert & Wallenius, Jyrki, 1992. "Multiple criteria decision support - A review," European Journal of Operational Research, Elsevier, vol. 63(3), pages 361-375, December.
    6. Kalaba, Robert & Rasakhoo, Nima & Tesfatsion, Leigh, 1989. "A FORTRAN program for time-varying linear regression via flexible least squares," Computational Statistics & Data Analysis, Elsevier, vol. 7(3), pages 291-309, February.
    7. Kalaba, Robert E. & Tesfatsion, Leigh S., 1990. "Flexible Least Squares for Approximately Linear Systems," Staff General Research Papers Archive 11190, Iowa State University, Department of Economics.
    8. Kalaba, Robert E. & Tesfatsion, Leigh S., 1989. "Time-Varying Linear Regression Via Flexible Least Squares," Staff General Research Papers Archive 11196, Iowa State University, Department of Economics.
    9. James S. Dyer & Peter C. Fishburn & Ralph E. Steuer & Jyrki Wallenius & Stanley Zionts, 1992. "Multiple Criteria Decision Making, Multiattribute Utility Theory: The Next Ten Years," Management Science, INFORMS, vol. 38(5), pages 645-654, May.
    10. Seiford, Lawrence M. & Thrall, Robert M., 1990. "Recent developments in DEA : The mathematical programming approach to frontier analysis," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 7-38.
    11. Charnes, A. & Cooper, W. W. & Golany, B. & Seiford, L. & Stutz, J., 1985. "Foundations of data envelopment analysis for Pareto-Koopmans efficient empirical production functions," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 91-107.
    12. R. D. Banker & A. Charnes & W. W. Cooper, 1984. "Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis," Management Science, INFORMS, vol. 30(9), pages 1078-1092, September.
    13. Kalaba, R. & Tesfatsion, L., 1989. "A Multicriteria Approach To Dynamic Estimation," Papers 8904, Southern California - Department of Economics.
    14. Leamer, Edward E, 1985. "Sensitivity Analyses Would Help," American Economic Review, American Economic Association, vol. 75(3), pages 308-313, June.
    15. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
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    Cited by:

    1. Berzins, Janis & Liu, Crocker H. & Trzcinka, Charles, 2013. "Asset management and investment banking," Journal of Financial Economics, Elsevier, vol. 110(1), pages 215-231.
    2. Peter Winker & Manfred Gilli & Vahidin Jeleskovic, 2007. "An objective function for simulation based inference on exchange rate data," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 2(2), pages 125-145, December.
    3. Vêlayoudom Marimoutou & Denis Peguin & Anne Peguin-Feissolle, 2009. "The "distance-varying" gravity model in international economics: is the distance an obstacle to trade?," Economics Bulletin, AccessEcon, vol. 29(2), pages 1139-1155.
    4. Zsolt Darvas & Balázs Varga, 2012. "Uncovering Time-Varying Parameters with the Kalman-Filter and the Flexible Least Squares: a Monte Carlo Study," Working Papers 1204, Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest.
    5. Josipa VIŠIC & Blanka ŠKRABIC, "undated". "Determinants of Incoming Cross-Border M&A: Evidence from European Transition Economies," EcoMod2010 259600168, EcoMod.

    More about this item

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs

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