The Properties of Model Selection When Retaining Theory Variables | Zendy

David F. Hendry | Zendy; Søren Johansen | Zendy

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The Properties of Model Selection When Retaining Theory Variables

Author(s) -

David F. Hendry,

Søren Johansen

Publication year - 2011

Publication title -

ssrn electronic journal

Language(s) - English

Resource type - Journals

ISSN - 1556-5068

DOI - 10.2139/ssrn.1950554

Subject(s) - estimator , selection (genetic algorithm) , set (abstract data type) , mathematics , model selection , set theory , econometrics , embedding , statistical theory , mathematical economics , statistics , computer science , artificial intelligence , programming language

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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