The Properties of Model Selection when Retaining Theory Variables

David Hendry and Soren Johansen

No 11-25, Discussion Papers from University of Copenhagen. Department of Economics

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: C18 (search for similar items in EconPapers)
Pages: 5 pages
Date: 2011-10-24
New Economics Papers: this item is included in nep-ecm
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Citations: View citations in EconPapers (4)

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Working Paper: The Properties of Model Selection when Retaining Theory Variables (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:kud:kuiedp:1125

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