The Properties of Model Selection when Retaining Theory Variables

David F.  Hendry; Søren Johansen

The Properties of Model Selection when Retaining Theory Variables

Department of Economics

Abstract

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.

Original language	English
Publisher	Department of Economics, University of Copenhagen
Number of pages	4
Publication status	Published - 2011

Access to Document

http://www.econ.ku.dk/english/research/publications/wp/dp_2011/1125.pdf

Cite this

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title = "The Properties of Model Selection when Retaining Theory Variables",

abstract = "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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