Model Selection in the Presence of Incidental Parameters

Yoonseok Lee and Peter Phillips

No 1919, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: This paper considers model selection in nonlinear panel data models where incidental parameters or large-dimensional nuisance parameters are present. Primary interest typically centres on selecting a model that best approximates the underlying structure involving parameters that are common within the panel after concentrating out the incidental parameters. It is well known that conventional model selection procedures are often inconsistent in panel models and this can be so even without nuisance parameters (Han et al, 2012). Modifications are then needed to achieve consistency. New model selection information criteria are developed here that use either the Kullback-Leibler information criterion based on the profile likelihood or the Bayes factor based on the integrated likelihood with the robust prior of Arellano and Bonhomme (2009). These model selection criteria impose heavier penalties than those associated with standard information criteria such as AIC and BIC. The additional penalty, which is data-dependent, properly reflects the model complexity arising from the presence of incidental parameters. A particular example is studied in detail involving lag order selection in dynamic panel models with fixed individual effects. The new criteria are shown to control for over/under-selection probabilities in these models and lead to consistent order selection criteria.

Keywords: (Adaptive) model selection; incidental parameters; profile likelihood; Kullback-Leibler information; Bayes factor; integrated likelihood; robust prior; model complexity; fixed effects; lag order (search for similar items in EconPapers)
JEL-codes: C23 C52 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2013-10
New Economics Papers: this item is included in nep-ecm and nep-ets
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Citations: View citations in EconPapers (1)

Published in Journal of Econometrics (October 2015), 188(2): 474-489

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Related works:
Journal Article: Model selection in the presence of incidental parameters (2015)
Working Paper: Model Selection in the Presence of Incidental Parameters (2013)
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