The Fragility of Sensitivity Analysis: An Encompassing Perspective

30 Pages Posted: 15 Dec 2008

See all articles by Neil R. Ericsson

Neil R. Ericsson

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: December 4, 2008

Abstract

Robustness and fragility in Leamer's sense are defined with respect to a particular coefficient over a class of models. This paper shows that inclusion of the data generation process in that class of models is neither necessary nor sufficient for robustness. This result holds even if the properly specified model has well-determined, statistically significant coefficients. The encompassing principle explains how this result can occur. Encompassing also provides a link to a more common-sense notion of robustness, which is still a desirable property empirically; and encompassing clarifies recent discussion on model averaging and the pooling of forecasts.

Keywords: encompassing, exogeneity, extreme bounds analysis, model averaging, parameter nonconstancy, pooling of forecasts, robustness, regime shifts, sensitivity analysis

JEL Classification: C52, E41

Suggested Citation

Ericsson, Neil R., The Fragility of Sensitivity Analysis: An Encompassing Perspective (December 4, 2008). FRB International Finance Discussion Paper No. 959, Available at SSRN: https://ssrn.com/abstract=1315273 or http://dx.doi.org/10.2139/ssrn.1315273

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