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Empirical Model Discovery and Theory EvaluationAutomatic Selection Methods in Econometrics$
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David F. Hendry and Jurgen A. Doornik

Print publication date: 2014

Print ISBN-13: 9780262028356

Published to MIT Press Scholarship Online: January 2015

DOI: 10.7551/mitpress/9780262028356.001.0001

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Role of Encompassing

Role of Encompassing

(p.159) 13 Role of Encompassing
Empirical Model Discovery and Theory Evaluation

David F. Hendry

The MIT Press

Encompassing seeks to reconcile competing empirical models, all of which claim to explain some economic phenomena. If distinct competing models exist, all but one must either be incomplete or incorrect—and all may be false. By testing whether one model can account for the results found by the other models, investigators can learn how well their model performs relative to those, as well as reduce the class of admissible models. Some features of the LDGP may not be included, so different empirical models capture different sets of salient features. All empirical models are encompassed by the LDGP, in that knowledge of that LDGP allows one to account for all the findings reported, even when some models are not nested with respect to others. It is natural to seek models which encompass the LDGP, and that motivates our selection strategy: specify a GUM which nests the LDGP, then simplify it to a model that is as parsimonious as feasible while still encompassing the GUM.

Keywords:   Encompassing, rival models, parsimonious encompassing, backward elimination

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