Encompassing in Stationary Linear Dynamic Models.

Journal article

A model M[subscript 1] encompasses a rival model M [subscript 2] if M[subscript 1] can explain M[subscript 2]'s results. A Wald Encompassing Test (WET) checks if a statistic of interest to M[subscript 2] coincides with an estimator of its predicted value under M[subscript 1]. We propose techniques for evaluating WETs in stationary, linear, dynamic, single equations with weakly exogenous regressors, extending results for strong exogeneity. Dynamics can constrain M[subscript 1]'s predictions of M[subscript 2]'s findings, so encompassing tests can differ from existing tests as examples illustrate. Their asymptotic power functions are compared with the outcomes in a small Monte Carlo. The results support the use of parsimonious encompassing tests.

Authors: Govaerts, B; Hendry, D; Richard, J

• Journal: Journal of Econometrics
• Volume: 63
• Publication date: 1994-01-01
• ISSN: 0304-4076
• Language: English