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The Properties of Model Selection when Retaining Theory Variables

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  • David F. Hendry

    (Economics Department and Institute for New Economic Thinking at the Oxford Martin School, University of Oxford)

  • Søren Johansen

    (University of Copenhagen and CREATES)

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.

Suggested Citation

  • David F. Hendry & Søren Johansen, 2011. "The Properties of Model Selection when Retaining Theory Variables," CREATES Research Papers 2011-36, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2011-36
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    References listed on IDEAS

    as
    1. Castle Jennifer L. & Doornik Jurgen A & Hendry David F., 2011. "Evaluating Automatic Model Selection," Journal of Time Series Econometrics, De Gruyter, vol. 3(1), pages 1-33, February.
    2. Wu, De-Min, 1973. "Alternative Tests of Independence Between Stochastic Regressors and Disturbances," Econometrica, Econometric Society, vol. 41(4), pages 733-750, July.
    3. Lovell, Michael C, 1983. "Data Mining," The Review of Economics and Statistics, MIT Press, vol. 65(1), pages 1-12, February.
    4. David F. Hendry & Hans-Martin Krolzig, 2005. "The Properties of Automatic "GETS" Modelling," Economic Journal, Royal Economic Society, vol. 115(502), pages 32-61, March.
    5. David Hendry & Carlos Santos, 2010. "An Automatic Test of Super Exogeneity," Economics Series Working Papers 476, University of Oxford, Department of Economics.
    6. Leeb, Hannes & Pötscher, Benedikt M., 2005. "Model Selection And Inference: Facts And Fiction," Econometric Theory, Cambridge University Press, vol. 21(1), pages 21-59, February.
    7. Hendry, David F., 2011. "On adding over-identifying instrumental variables to simultaneous equations," Economics Letters, Elsevier, vol. 111(1), pages 68-70, April.
    8. Søren Johansen & Bent Nielsen, 2008. "An analysis of the indicator saturation estimator as a robust regression," Discussion Papers 08-03, University of Copenhagen. Department of Economics.
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    Citations

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    Cited by:

    1. Sullivan Hué, 2022. "GAM(L)A: An econometric model for interpretable machine learning," French Stata Users' Group Meetings 2022 19, Stata Users Group.
    2. Emmanuel Flachaire & Gilles Hacheme & Sullivan Hu'e & S'ebastien Laurent, 2022. "GAM(L)A: An econometric model for interpretable Machine Learning," Papers 2203.11691, arXiv.org.
    3. David F. Hendry & Felix Pretis, 2013. "Anthropogenic influences on atmospheric CO2," Chapters, in: Roger Fouquet (ed.), Handbook on Energy and Climate Change, chapter 12, pages 287-326, Edward Elgar Publishing.

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    More about this item

    Keywords

    Model selection; theory retention.;

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General

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