Using Model Selection Algorthims to Obtain Reliable Coefficient Estimates

Jennifer Castle, Xiaochuan Qin and W. Reed ()

Working Papers in Economics from University of Canterbury, Department of Economics and Finance

Abstract: This review surveys a number of common Model Selection Algorithms (MSAs), discusses how they relate to each other, and identifies factors that explain their relative performances. At the heart of MSA performance is the trade-off between Type I and Type II errors. Some relevant variables will be mistakenly excluded, and some irrelevant variables will be retained by chance. A successful MSA will find the optimal trade-off between the two types of errors for a given data environment. Whether a given MSA will be successful in a given environment depends on the relative costs of these two types of errors. We use Monte Carlo experimentation to illustrate these issues. We confirm that no MSA does best in all circumstances. Even the worst MSA in terms of overall performance – the strategy of including all candidate variables – sometimes performs best (viz., when all candidate variables are relevant). We also show how (i) the ratio of relevant to total candidate variables and (ii) DGP noise affect relative MSA performance. Finally, we discuss a number of issues complicating the task of MSAs in producing reliable coefficient estimates.

Keywords: Model selection algorithms; Information Criteria; General-to-Specific modeling; Bayesian Model Averaging; Portfolio Models; AIC; SIC; AICc; SICc; Monte Carlo Analysis; Autometrics (search for similar items in EconPapers)
JEL-codes: C15 C52 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2011-01-01
New Economics Papers: this item is included in nep-ecm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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https://repec.canterbury.ac.nz/cbt/econwp/1103.pdf (application/pdf)

Related works:
Journal Article: USING MODEL SELECTION ALGORITHMS TO OBTAIN RELIABLE COEFFICIENT ESTIMATES (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:cbt:econwp:11/03

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