The Properties of Model Selection when Retaining Theory Variables

TY - UNPB

T1 - The Properties of Model Selection when Retaining Theory Variables

AU - Hendry, David F.

AU - Johansen, Søren

N1 - JEL classification: C18

PY - 2011

Y1 - 2011

N2 - 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.

AB - 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.

M3 - Working paper

BT - The Properties of Model Selection when Retaining Theory Variables

PB - Department of Economics, University of Copenhagen

ER -