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The Properties of Model Selection when Retaining Theory Variables

David Hendry () and Soren Johansen ()

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

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.

Keywords: Model selection; theory retention. (search for similar items in EconPapers)
JEL-codes: C21 C18 (search for similar items in EconPapers)
Date: 2011-10-13
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Working Paper: The Properties of Model Selection when Retaining Theory Variables (2011) Downloads
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