The Model Selection Criteria (Econometrics)

Model Selection Criteria

Many of us have studied in Econometrics or Statistics about the model selection criteria by CLRM approach. It is said that with congruency to the CLRM assumption that how the model is specified and hence no any specification error occurs.

The basic queries dealt over here are:

a) How do we find out the correct model ? 

b) What is the criteria to select a good model ? 

■ Other important coverages are:

♢ What are the types of specification errors that a person commits while specifying the model ? 

♢ What are the consequences of model specification errors ? 

♢ How does one find out whether model specification error is committed or not ? 

♢ Having committed the specification error, how to correct it? 

♢ How does one choose between the competing models ?

These are the several concerns of the model selection criteria. Richard and Henry discussed the criteria for an econometric model.

● A model adopted for empirical analysis should satisfy the following conditions:

☆ Should be data admissible (the predictions made from the model must be logically permissible).

☆ Consistent with the theory.

☆ Weakly exogenous regressors (the explanatory variables should be uncorrelated with the error term). 

This will be automatically satisfied if X is assumed to be exogenous, if X is endogenous we have to ensure that the Co variance ( Xi Ui), COV(Xi Ui) = 0, else we will get inconsistent estimates. This problem is the ENDOGENEITY PROBLEM (will be discussed in up coming blogs). 

The system must exhibit the following:

¤ It must exhibit the parameters consistency. The value of the parameters must be stable.

¤ It must exhibit the data coherency. The residuals obtined from the model should be purely random.

¤ Should be encompassing ( the choosen model should be in alternative cases, also known as nesting).  

Thank you.

Aditya Raz Pokhrel

MBA, MA Economics, MPA.