Regression Models with Data‐based Indicator Variables

David Hendry and Carlos Santos ()

Oxford Bulletin of Economics and Statistics, 2005, vol. 67, issue 5, 571-595

Abstract: Ordinary least squares estimation of an impulse‐indicator coefficient is inconsistent, but its variance can be consistently estimated. Although the ratio of the inconsistent estimator to its standard error has a t‐distribution, that test is inconsistent: one solution is to form an index of indicators. We provide Monte Carlo evidence that including a plethora of indicators need not distort model selection, permitting the use of many dummies in a general‐to‐specific framework. Although White's (1980) heteroskedasticity test is incorrectly sized in that context, we suggest an easy alteration. Finally, a possible modification to impulse ‘intercept corrections’ is considered.

Date: 2005
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https://doi.org/10.1111/j.1468-0084.2005.00132.x

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Working Paper: Regression Models with Data-based Indicator Variables (2004)
Working Paper: Regression Models with Data-based Indicator Variables (2004)
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Oxford Bulletin of Economics and Statistics is currently edited by Christopher Adam, Anindya Banerjee, Christopher Bowdler, David Hendry, Adriaan Kalwij, John Knight and Jonathan Temple

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