Model selection in the presence of incidental parameters

Yoonseok Lee and Peter Phillips

Journal of Econometrics, 2015, vol. 188, issue 2, 474-489

Abstract: This paper considers model selection in panels where incidental parameters are present. Primary interest centers on selecting a model that best approximates the underlying structure involving parameters that are common within the panel. It is well known that conventional model selection procedures are often inconsistent in panel models and this can be so even without nuisance parameters. 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 a bias-reducing prior. 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 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; Integrated likelihood; Bias-reducing prior; Fixed effects; Lag order (search for similar items in EconPapers)
JEL-codes: C23 C52 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Related works:
Working Paper: Model Selection in the Presence of Incidental Parameters (2013)
Working Paper: Model Selection in the Presence of Incidental Parameters (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:188:y:2015:i:2:p:474-489

DOI: 10.1016/j.jeconom.2015.03.012

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