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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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Retaining a Theory Model During Selection

Retaining a Theory Model During Selection

(p.167) 14 Retaining a Theory Model During Selection
Empirical Model Discovery and Theory Evaluation

David F. Hendry

The MIT Press

Economic theories are often fitted directly to data to avoid any issues of model selection. This is an excellent strategy when the theory is complete and correct, but less successful otherwise. We consider embedding a theory model that specifies the set of n relevant exogenous variables, xt, within a larger set of n+k candidate variables, (xt; wt), but only select over the wt. When the theory model is complete and correct, so the wtare in fact irrelevant, by orthogonalizing them with respect to the xt, selection over the orthogonalized components can be undertaken without affecting the theory parameters’ estimator distributions. This strategy keeps the theory-parameter estimates when the theory is correct, yet protects against the theory being underspecified when some wt are relevant

Keywords:   Retaining theory models, orthogonalizing candidate variables, theory evaluation

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