The Properties of Model Selection When Retaining Theory Variables

University of Copenhagen Discussion Paper No. 11-25

5 Pages Posted: 29 Oct 2011

See all articles by David F. Hendry

David F. Hendry

University of Oxford - Department of Economics

Soren Johansen

University of Copenhagen - Department of Economics; Aarhus University - CREATES

Date Written: October 28, 2011

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

JEL Classification: C521, C18

Suggested Citation

Hendry, David F. and Johansen, Soren, The Properties of Model Selection When Retaining Theory Variables (October 28, 2011). University of Copenhagen Discussion Paper No. 11-25, Available at SSRN: https://ssrn.com/abstract=1950554 or http://dx.doi.org/10.2139/ssrn.1950554

David F. Hendry

University of Oxford - Department of Economics ( email )

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Soren Johansen (Contact Author)

University of Copenhagen - Department of Economics ( email )

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Aarhus University - CREATES ( email )

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