Step-indicator Saturation

Jun 2013 | 658

Authors: David Hendry, Jurgen A. Doornik, Felix Pretis

Using an extension of general-to-specific modelling, based on the recent developments of impulse-indicator saturation (IIS), we consider selecting significant step indicators from a saturating set to capture location shifts.  The approximate non-centrality of the test is derived for a variety of shifts using a 'split-half' analysis, the simplest specialization of a multiple-block search algorithm.  Monte Carlo simulations confirm the accuracy of the nominal significance levels under the null, and show rejections when location shifts occur, improving in non-null rejection frequency compared to the corresponding IIS-based and to Chow (1960) tests.

JEL Codes: C51, C22

Keywords: General-so-specific, step-indicator saturation, test power, location shifts, model section, Autometrics

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