Chapter

An Empirical Application and Monte Carlo Analysis of Tests of Dynamic Specification

David F. Hendry and Grayham E. Mizon

in Econometrics: Alchemy or Science?

Published in print October 2000 | ISBN: 9780198293545
Published online November 2003 | e-ISBN: 9780191596391 | DOI: http://dx.doi.org/10.1093/0198293542.003.0008
 An Empirical Application and Monte Carlo Analysis of Tests of Dynamic Specification

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COMFAC is employed as a sequential simplification device in empirical analysis. Analysis of the finite‐sample statistical properties checked the power when a COMFAC representation of economic agents’ behaviour was valid. Improved test power response surfaces were proposed. Combined, the findings suggested using other model reduction devices, retaining COMFAC as a destructive testing device for invalid ‘autocorrelation correction’ claims. Diagnostic testing of the initial model was emphasized. Model selection (lag length, choice of simplification, and parameter) is investigated for highly seasonal data.

Keywords: COMFAC; consumer durables; demand; diagnostic testing; model reduction; model selection; test power response surfaces

Chapter.  16272 words.  Illustrated.

Subjects: Econometrics and Mathematical Economics

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