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Seleccion of Regressors in Econometrics Non Parametrics & Parametrics Methods - Lavergne
Seleccion of Regressors in Econometrics Non Parametrics & Parametrics Methods - Lavergne
Econometric Reviews
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To cite this article: Pascal Lavergne (1998) Selection of regressors in econometrics: parametric and nonparametric methods
selection of regressors in econometrics, Econometric Reviews, 17:3, 227-273, DOI: 10.1080/07474939808800415
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ECONOMETRIC REVIEWS, 17(3), 227-273 (1998)
SELECTION OF REGRESSORS
IN ECONOMETRICS: PARAMETRIC
AND NONPARAMETRIC METHODS
Pascal Lavergne
INRA-ESR, B P 27
31326 CASTANET-TOLOSAN Cedex FRANCE.
E m a i l : [email protected]
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ABSTRACT
The present paper addresses the selection-of-regressors issue into a general dis-
crimination framework. We show how this framework is useful in unifying various
procedures for selecting regressors and helpful in understanding the different strate-
gies underlying these procedures. We review selection of regressors in linear, non-
linear and nonparametric regression models. In each case we successively consider
model selection criteria and hypothesis testing procedures.
1 Introduction
This paper presents a general framework for model discrimination and its use for
selecting explanatory variables in regression models. The focus on the selection-of-
regressors issue is motivated by several considerations. On a pedagogical viewpoint,
the statistical procedures are more easily exposed in the setting of regressors choice.
This allows to focus on the main features of the approach. But, more importantly,
selecting regressors is one of the foremost issues in empirical modelling and arises in
the simplest linear model as well as in general nonparametric regression models. The
matter is even more acute in economics than in experimental sciences, as economic
theory often suggests a large collection of potential explanatory variables among
which one would like to discriminate. This motivates the large and long-standing
econometric literature focusing on this problem.
It must be first recognized that the selection-of-regressors issue can occur from
qualitatively different purposes. When an econometrician has data on a number of
potential explanatory variables, his goals may be as various as (i) the knowledge of
exactly which variables are relevant in explaining the dependent variable, (ii) the
simplification of a general complex model, (iii) the precise estimation of some pa-
rameters of interest, (iv) the predictive ability of the model or simply (v) its ease
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may help in suggesting new ones. The third notable quality of the framework is that
it leads to a better understanding of the particular strategy underlying any practi-
cal selection procedure and clarifies the implicit assumptions needed for obtaining
desirable properties.
More crucially, the discrimination approach can take into account misspecifi-
cation of the models under consideration. This is a key feature for application in
econometrics. Indeed, it is now widely recognized that an economic model (. . .) is
in fact only a more or less crude approximation to whatever might be the "true" rela-
tionships among the observed data, rather than providing an accurate description of
either the actual economic or probabilistic relationships (White, 1994). In addition,
the framework easily extends to models that depend on some infinite dimensional
parameters. Therefore it can be adapted to selection among semiparametric and
nonparametric models that are becoming popular in econometrics.
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The selection of regressors issue is a perfect instance where the variety and
the richness of the discrimination approach can be exemplified. In the aim t o give
an extensive picture, we expose some very popular selection procedures and others
that illustrate unusual applications of the approach. Though, it is clearly impossible
to be exhaustive. In particular, we intentionally adopt a frequentist viewpoint and
omit procedures based on Bayesian arguments, such as Schwarz's (1978) information
criterion or Jeffreys' posterior odds, see Zellner (1971). However, the discrimination
framework is really a decision-theoretic one, and does not seem t o conflict with a
bayesian viewpoint. We also confine ourselves to i.i.d. contexts and do not cope
with time series (only in a few occasions reference is made to order determination
in autoregressive models). Finally, we mainly focus on the asymptotic properties of
the procedures and do not discuss their small sample properties or situations where
the number of candidate regressors is large with respect to the sample size. We hope
however that this review will answer some of the common questions of practitionners
and will be a useful guide for further reading.
Our review is organized as follows. In Section 2, we present a general framework
for discrimination by mean of a discrepancy. The following three sections are re-
spectively devoted to linear, nonlinear and nonparametric regression models. In each
section we consider successively model selection criteria and hypothesis testing pro-
cedures, and for the latter, we distinguish between nested and nonnested situations.
For general properties of parametric estimation methods and testing procedures, as
well as regularity conditions for their validity, the reader can refer t o Newey and
McFadden (1994). We focus on two particular discrepancies, the Gauss discrepancy
LAVERGNE
selection procedures based on the Gauss discrepancy. Because this literature is still
in its infancy, much cited work is still unpublished and the related bibliography is
of a more tentative nature. The Conclusion is devoted to more general comments.
'Our presentation of the discrimination approach is largely inspired by Linhart and Zucchini
(1986).
SELECTION OF REGRESSORS IN ECONOMETRICS 23 1
2~ependingof the context, the discrepancy can be defined over unconditional or conditional (to
some explanatory variables) distributions.
232 LAVERGNE
the complexity of the approximating family. Lastly, the overall discrepancy mea-
sure is A(@ = A(G;, Fo) and gauges the loss incurred from both approximation
and estimation. In many cases, the overall discrepancy is simply the sum of the
two previous measures, but even if it is not, when the complexity of Gs increases,
the two effects - improvement of approximation and deterioration in estimation -
generally act in opposition to each other.
Strategy The choice of the discrepancy function determines which aspect of the
model is important for the practitionner.3 The particular measure that serves as a
basis of comparison is driven by the goal of the selection process. One possibility is
to compare competing approximating models through their associated discrepancy
measure due to approximation A(08). This arises in applications where we want
to select the approximating family which potentially gives the best fit, irrespective
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of whether this can be achieved with a given sample, e.g. when we confront two
competing economic theories or in pilot studies to larger experiments. Another
possibility is to compare competing fitting procedures, which consist in pairs of an
approximating family and an estimation method. Because the overall discrepancy
measure A(@ heavily depends on the particular sample at hand, it may be too haz-
ardous to use it. As we usually want t o favour estimated models which, on average,
result in low overall discrepancies, the selection can be based on the expected overall
discrepancy E [ ~ ( g ).'] If the same estimation method is used in each fitting proce-
dure, we will effectively select among competing approximating families. Because of
the two competing effects previously mentioned, it can occur that in finite samples
the expected overall discrepancy is minimum for an approximating family that is
not correctly specified, even when such a model is among the considered ones. On
the other hand, if the fitting procedures differ only through the estimation method,
we will select among competing estimator^.^
sion, it will still depend on unknown parameters from the DGP and will have to
be estimated. For implementation of the procedure, we thus need an estimator of
the chosen discrepancy measure, which we call a criterion. To define this criterion,
we may rely on finite sample properties or resort to either asymptotic arguments
or resampling schemes. Though each problem requires its own method of analysis,
a usual device is t o use the empirical distribution in place of the unknown Fo,so
that A(Gp Fo) is estimated by A(Gp F,). Similarly, a natural related choice for the
A
'In a parametric setup, the dimension of an approximating model Go is usually the one of O.
For selection of regressors, this is the dimension of the regressors' set.
234 LAVERGNE
variability of the criteria. For comparing two approximating models Gel and Go,,
the null hypothesis tested is
against
H1: a(0;) < A(0,.)
speaking based on the properties under the DGP and do not need to assume the
correctness of any of the approximating r n ~ d e l s . ~
The two type of tests can be equivalent only if the implicit null and alternative
hypotheses are indentical. This is the case when comparing two nested models Gel
and Go, with respect to their discrepancy due to approximation and assuming the
correctness of the general model Ge,. While the null hypothesis of the specification
test is the correctness of Go,, the null hypothesis of the discrimination test also
reduces here t o the correctness of the restricted model. Indeed, the correctness of
Gez means that the DGP belongs to this family, i.e. A(823) = 0, SO that the null
hypothesis A(0;) = A(0;) is equivalent to A(@;) = 0, i.e. the correctness of Go,. It
will be seen in our review that most populars tests for nested hypotheses are both
specification and discrimination tests. This special equivalence property, holding in
a well-known but particular situation, is certainly one of the main reasons of the
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The dimension p may vary along different approximating models, and there may also
exists many approximating models with p regressors from k, but we will use this
generic form and called such a model a p-model.' Note that the complete k-model
itself is often one of the considered competing approximating models.
'If such an assumption is done, the strategy can nevertheless be used with qualifications.
'One can also consider more general formulations embodying linear combinations of variables.
236 LAVERGNE
Ac(GelFo) = EF~
[YO - EG~(YOIX~)J~.
Here yo is a (n x 1) vector generated as but independently of y, EF, and EGO
denote expectations with respect to the DGP and with respect to an element of the
approximating family respectively, and the notation v2 means V'V.~ In case of linear
approximating models, the discrepancy due to approximation is
2
E F ~[YO - xPP;] = min {EF, [YO - ~ ~ ;Pp4E R p~) . 1 ~
The expected overall discrepancy is
EFO[YO - xPpp]
It is easily seen that XpP,* = PPX& where Pp = Xp(XLXp)-'Xi is the projection
matrix on the subspace spanned by Xp. The minimum empirical Gauss discrepancy
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'The vector yo is introduced to formdy distinguish between the discrepancy, defined indepen-
dently from the observations, and the criteria, which rely on them.
SELECTION OF REGRESSORS IN ECONOMETRICS 237
M S E P is
n+pRSSp = -
-- PC
n n-p n '
where RSSp is the residual sum of squares for the estimated pmodel. The Prediction
Criterion PC is found in Rothman (1968),Hocking (1972) and Amemiya (1980).
These authors propose t o compare the value of PC across the competing pmodels.
It is clear from what preceeds that one assumes correctness of the pmodel under
consideration to derive the criterion. Therefore, the selection procedure comes to
consider each model as correct. This strategy has been labelled as optimistic by
Amemiya (1980). It is indeed really optimistic to assume that every considered
model is correct, but we will see that other rules are from the same vein.
Mallows' Cp Assuming that the DGP belongs to Model 0, we can derive an un-
biased estimator of the M S E P . Indeed, we have
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and C p is equivalent to use of S p under the normality assumption, see Kina1 and
Lahiri (1984).
employed here is optimistic, as is the PC rule, for one assumes the correctness
of the pmodel to derive the criterion, and subsequently compares criterion among
models.1° When comparing the optimal subset with a larger one, the probability of
picking up the optimal model is considerably less than unity, because both criteria
have the same expectation, see Ebbeler (1975). This is by no mean surprising. From
our framework, it is clear that minimizing the residual variance does not ensure that
irrelevant variables will be eliminated, but only that pertinent ones will not be
removed.
T h e Fisher test Let us focus on the choice between Model 0 and a restricted
model with p regressors and compare their discrepancies due t o approximation."
The equality
prevents the pmodel from dominating the complete one. Therefore the null hypoth-
esis of interest is
2
Ho : E [Yo - xpoj2 = E [YO - x,P,']
''In the general case, we get from (2) that 2; is a biased but consistent estimator of a;'.
"From now on, we omit indices in expectation.
SELECTION OF REGRESSORS IN ECONOMETRICS 239
If the testing procedure does not reject Ho, we will by convention retain the p
model, that is we adopt a parsimony principle for discrimination. By Equation (4),
we obtain
Ho u ,f3o'X1MPXPo = 0
This hypothesis can be tested via the least-squares estimator of P in the general
model by the statistic
monograph (1990). Nothing unfortunately ensures that the optimal subset, or even
the relevant variables, will be selected by mean of one of these methods.12 But in
practice, stepwise methods may prove useful when the sample size is relatively small
compared with the number of potential regressors.
Wallace's test If we consider now the overall expected discrepancy, the null hy-
pothesis of interest is
against
i ~ - ]xp12.
Ha : E[yo - ~ ~ f> E[yo ~
Now because
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where pp = (pp,O) and the regressors have been suitably ordered. Thus, the null
hypothesis is that the restricted estimator is better in weak mean squared error than
the unrestricted one, as termed by Wallace (1972). He shows that a necessary and
sufficient condition for HO to hold is that X 5 ( ~ 1 2 )It. follows that HO can be tested
by mean of the F-statistic. Goodnight and Wallace (1972) provide tables for such a
test.
121n their defense, it should be noted that optimality was never claimed by the originators of
stepwise methods.
SELECTION OF REGRESSORS IN ECONOMETRICS 24 1
should be positive semi-definite. Toro-Vizcarrondo and Wallace show that this holds
if and only if X I 1/2, so that again a test can be based on the classical F statistic
and critical values given in Wallace and Toro-Vizcarrondo (1969).
The regressors sets may have some common variables W plus some idiosyncratic
ones Z1 and Z2. This situation may arise for instance when the practitioner can use
two different proxies for the same unobservable variable.
The null hypothesis can actually be interpreted as the one that the expectation of
yo (i.e. of y) lies a t an equal distance from the space spanned by X1 and the space
spanned by X2. Hotelling (1940) was the first t o propose a testing procedure for
Ho in the case of linear univariate regression models. Chow (1980) generalizes this
procedure to the case of multidimensional X1 and X2 which are disjoint (apart from
the constant term). From (4), we have the equivalence
F= I xP - xb 112
ll Y - xfi l12/(n - k)
is approximately distributed as a central F(1,n - k) under the null hypothesis.
Efron's test Comparing the overall expected discrepancy associated with each of
the model leads to the null hypothesis
H o : E[YO ~ E[VO-X~W]~.
-XIW]=
Efron (1984) built a testing procedure from the criteria (3) and a nonparametric
bootstrap procedure that approximates the distribution of their difference. He re-
lates his approach to Hotelling's one in the univariate case and also gives geometrical
interpretation of the comparison between discrepancies.
Efron's test, as well as Hotelling's procedure, does not require any of the com-
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peting models to be correctly specified, i.e. to include the unknown DGP. Lien
and Vuong (1987) propose a testing procedure based on the likelihood ratio for
nonnested linear normal models, that also allows for misspecification of both models
under consideration.
'(X, P) = G ' P ) ,
so that imposing nullity of some parameters amounts t o selecting some subset of X .
In other instances, the framework may be more general than a choice of variables
problem. The variables in X can be either fixed or random. The Gauss discrepancy
writes
EFO - r ( x , p)I2.
The discrepancy due to approximation is
SELECTION OF REGRESSORS IN ECONOMETRICS 243
EFO [y - Wp^)I2
With iids observations {(yi, Xi), i = 1,.. ., n) from the process (Y, X ) , the minimum
empirical Gauss discrepancy estimator of /I is
+
[Y - ro(x)12 EF, [ro(x) - r ( x , P ) ]
M S E P = E F ~[Y - r(x,p^)I2= E F ~
2
Sample reuse methods Maybe the oldest idea found in the literature is t o split
the sample in two subsamples, using the first for estimation and the second for
model selection. A refinement is then introduced as the leave-one-out method: one
computes 8-; on the (n- 1)sample obtained by omitting observation i and compute
the associated predicted residual, i.e. yi minus its predicted value estimated by
r(Xi, p i ) . The cross-validation criterion is just the corresponding mean of squared
predicted residuals
CV = ( l l n ) xn
i=l
[yi - r(xi,b i ) ]
2
= ( l l n )PRESS,
13For the sake of simplicity, we do not explicitely consider heteroscedastic models and weighted
nonlinear least-squares.
244 LAVERGNE
-
Another well-known method is the generalized cross-validation, introduced by
to nS,.
A noteworthy advantage of cross-validation devices is that they allow t o es-
timate the prediction error without particular assumptions on the unknown DGP.
This is particularly valuable, even with respect to classical criteria in the linear
model.
Asymptotic optimality: case of a fixed DGP Let us assume that the DGP
is among the considered approximating models with corresponding value Do. For
simplicity of exposition, we consider selection of variables among models of the form
(5) and distinguish two categories of models. Category I gathers models such that
at least one nonzero component of Po is not in ,f3, while models in Category I1 are
such that ,f3 contains all nonzero components of Po. The models in Category I are
incorrect models, while some models in Category I1 may be inefficient because of
their unnecessarily large sizes. It is desirable that the selection rule asymptotically
selects an optimal model, a model with minimal dimension in Category 11.
In terms of M S E P , models in Category I differ from those in Category I1 by
at least Elb [ r o ( x ) - r ( X , ,@] , which under suitable conditions tends to a positive
2
ma1 only if the DGP coincides with the larger model, as in this case Category I1 is
a singleton.
Let us explain further why the C V rule is not optimal. The deleted C V
estimates the M S E P based on a sample of size (n - d), rather than n. Now what is
central for selection is t o accurately estimate the differences in M S E P across models.
Between models of different categories, this is not difficult as their difference is an
0 ( 1 ) , because of a bias term in the second term of (6). However, among models
in Category 11, this difference is an O(n - d)-', for the second term in (6) is a
variance term, see e.g. Equation (1). But the error in estimation is typically of
order n-' and the usual C V rule with fixed d therefore fails to distinguish between
models in Category 11. Shao (1993) show that inconsistency of the leave-one-out
cross-validation can be rectified by using a leave-d-out cross-validation with d, the
number of observations reserved for validation, satisfying d/n + 1 and n - d + ca
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Breiman and Freedman (1983) also consider a setup where the DGP is a linear
model with an infinity of ordered regressors and show that use of S, asymptotically
leads to retain the subset minimizing Ex [ M S E P ] .
0 Conditional (or residual) bootstrap: Let Qi be the i-th residual from the esti-
mated full model. Generate {uT, i = I , . . . n ) from the distribution that puts
mass n-l on each Q i / J m , i = 1 , . . ., n. Consider bootstrap samples
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{(XI
Po in the full correct model.
Unconditional (or paired) bootstrap seems more approriate for random regressors,
though it can also be used in the deterministic case. Let be the least-squares
estimator on each bootstrap sample. Efron (1993) derives a bootstrap estimate of
M S E P as
RSS
= - +n E { ( / n ) i=l
[ y i - r ~ , ) ] 2 - ( i=l
/ n [ y - r ~ , ]
is minimized over the competing models. For the conditional bootstrap, the method
may not be easy to implement unless there is a special structure in the regressors
values. The modified procedure consists in bootstrapping n residuals from a dis-
tribution that puts mass n-' on each fi i = 1,. . .,n. As in
SELECTION OF REGRESSORS IN ECONOMETRICS 247
the cross-validation scheme of Shao (1993), these bootstrap schemes allow to get an
error in estimation of M S E P that is of smaller order than the difference in M S E P .
The choice of m in the bootstrap procedure (as well as the choice of d in the balanced
incomplete CV) clearly needs to be investigated further.
Breiman (1992, 1996) proposes a different method. Building on the fact that
E [y] + = 0
: EF. [ ~ o ( x )- r(x,,@I2 + 2 E p ~[uo ( ~ o ( x )- r(x,,@)] ,
an estimator of M S E P can be constructed as
where comes from the estimation of the complete model (assumed to be correct)
and t is chosen as to be "small" (between 0.6 and 1). Consider bootstrap samples
{(Xi, y: = yi + ~ i ) ,i = 1, . . ., n)}, from these compute 2 = [r (XI,p),. . ., r (x,,, @ )It
and
1
Bp = liE* [ E , PI.
The procedure is labelled little bootstrap. When the limit of Bp when t + 0 exists,
it is called the tiny bootstrap. Breiman (1992, 1996) investigates the properties of
these procedures in several Monte-Carlo experiments (see also Breiman and Spector,
1992, for the X-random case).
where fo characterizes the unknown DGP. We can consider the equivalent monotonic
transformation Ejo[logg(ylx,e)]. The discreparicy due to approximation then writes
tions {(yi, Xi),i = 1, . . . , n) from the process (Y, X ) , the corresponding minimum
discrepancy estimator is the maximum likelihood (ML) estimator,
n
5 = arg max {LE (8) ; 0 E O) , where Li(8) = log g(yi(Xi,8).
i=l
It is useful for what follows to recall the asymptotic properties of the ML estimator,
see White (1982). Its probability limit is called the pseudo-true value of the param-
eter 0 defined as 19' = argmaxs Ejo [logg(ylx,O)]. The asymptotic distribution of
is given by
J;;(5 - e*) 4 N (0,R - ~ ( B * ) C ( B * ) R(ex))
-~ , (7)
where
When the DGP is included in the approximating family, i.e. fo = g(y(x,80) for some
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Bo, then 6" = do and the information matrix equivalence S2(e0) = C(Bo) holds, so
that Jii (5- 00) N (0, R(Bo)).
In nonlinear contexts, asymptotic properties are in general the only ones avalaible.
Definition of criteria will then naturally rely on asymptotic approximations. Under
standard regularity conditions, Linhart and Zucchini (1986) show (see our Appendix
for a sketch of the proof) that
Sawa's Information Criterion For estimating Ej0 [log g(ylx, $)I, it can be pos-
sible to compute the value of trW1(t9*)C(t9*)if one assumes some particular form for
the DGP. Consider for instance the linear Model 0 of Section 2 and a linear normal
approximating pmodel, then
where is the residual variance of the pmodel. Sawa (1978) replaces the un-
known residual variances a: and a;2 by their ML estimators 5
: and i?; and gets the
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Information Criterion
Chow's extension Chow (1981) treats the general case where the information
matrix equivalence does not hold. As R(t9') and C(t9') can be estimated by their
sample analogs 6(8)and g(@,without any parametric assumption on the DGP, he
proposes the criterion
L;(Q - (1/n)tr6-'(6j5($),
to estimate El, [ ~ o ~ ~ ( ~ l x In
, @the
] . case of linear normal models, a monotonic
transformation of Chow's criterion gives Sawa's BIC.
15~kaike(1973) actually imposes that the estimated model is not too far from the unknown
DGP,by mean of a condition that is quite ambiguous. For a detailled derivation of AIC under the
assumption of a correct specification, see Amemiya (1980).
250 LAVERGNE
Sample reuses approaches are also suggested by Geisser and Eddy (1979), but
have been little investigated in the litterature. The leave-one-out criterion is shown
to be asymptotically equivalent to AIC by Stone (1977) under the assumption of a
fixed DGP.
Asymptotic optimality Information criteria has been first studied in the context
of time series, and specifically for determining the order of an autoregression. In the
context of a fixed DGP, Shibata (1976) show that AIC tends t o overestimate the
number of lags, unless the DGP corresponds to the maximum order. Alternatively,
Shibata (1980) show optimality of AIC when the order of the autoregression is
infinite.16 For a fixed DGP, Hannan and Quinn (1979) show that (almost sure)
optimality is reached for the modified information criteria
for any c > 1, where 8; is the ML variance estimator in the autoregression of order
p (the first term corresponds to - ( 2 / n ) ~ i ( 6 ~ ) ) .
In the context of independence sampling, Nishii (1988) copes with a situation
where any model under consideration may be misspecified. He studies the optimality
of selection procedures based on penalized likelihood criteria of the form
He shows that the penalty attached with the dimension of the model cn should
satisfy
Cn
lim
n+cc
5
n
=0 and lim
n+m
-
log log n
- +oo
to ensure almost sure consistency while
lim
n+cc
-
Cn
n
=0 and lim c - +oo
n+cc -
is sufficient for weak consistency. Sin and White (1996) generalizes this work in
several directions and weakened the conditions found by Nishii. In particular, they
consider dependent and heterogeneous processes. For weak consistency, the condi-
tions are similar. For strong consistency between two models, when assuming that
one is correct, one can take exploit the information matrix equivalence and recovers
Hannan and Quinn's result. Otherwise, the conditions on the penalty term gener-
1 6 ~ h e sresults
e are analogous to the ones reported in Section 4.1.
SELECTION OF REGRESSORS IN ECONOMETRICS 25 1
ally vary depending on the two models being compared. The penalty term is then
interpreted as corresponding t o a critical value in a testing procedure.
Tests for nested models Consider two approximating models G1 and G2 such
that G I C G2. Within the discrimination framework, an hypothesis testing proce-
dure aims to compare the discrepancy measures associated with two approximating
models. By properties of a discrepancy, the discrepancy due to approximation can-
not be greater for G I , so that we shall test the null hypothesis
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It turns out that the null hypothesis is equivalent to gl (yls, 8;) = g2(ylx,O;), see
Vuong (1989a). Moreover, it often reduces to some linear or nonlinear restrictions
on the parameters of the form HO : ~ ( 8 3=
) 0.
One of the most popular method for testing such an hypothesis is the Wald
test, based on the statistic
where ?(&) is an estimator of the asymptotic variance of &. If one assumes further
that G2 contains the DGP, so that g2(yls,8;) = fo, then one can use ?(a2) = fi(e^,).
The resulting statistic W is asymptotically distributed as a central x2 with r degrees
of freedom under HO. Other procedures include the Lagrange multiplier test and
the Hausman-Wald test, see e.g. White (1994). They are asymptotically equivalent
to the Wald test under the null hypothesis.
However, it is possible to build a test for No without the optimistic view that the
largest approximating model contains the DGP. Specifically, the asymptotic variance
of 8 is given by (7). White (1982) derives robust versions of the Wald and Lagrange
- A - A
multiplier tests, that use the variance estimator ?(@= ~ ~ - ' ( B ) C ( O ) R - ' ( ~These
).
are robust to misspecification in the sense that it is not assumed that the approx-
imating models are correctly specified. As their classical analogs, robust tests are
asymptotically equivalent and distributed as a x 2 ( r ) under HO.
These tests also share the particularity of not testing the initial hypothesis Ho,
but some equivalent form as HO. The initial hypothesis of equal entropies can be
LAVERGNE
-.
In the simple case of no misspecification, the statistic 2 LR,(&, 82) is asymptotically
distributed as a x ~ ( T ) under Ho, and is asymptotically equivalent to t.he classical
Wald statistic. However, for the case of two possibly misspecified approximating
models, this asymptotic equivalence does not generally hold. Specifically, Vuong
(1989a) shows that under Ho, 2 LR,(&, $22) converges in distribution to a weighted
sum of independent chi-squares. Moreover a test based on this statistic is consistent
against Ha.It is only when the information matrix equivalence holds for the larger
model that the test statistic has the usual x 2 ( r ) null asymptotic distribution.
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While all parameters are yet not identifiable in this model, a specification test
of M1 can be entertained by a two-step procedure as proposed by Davidson and
MacKinnon (1981): first estimate Model M2, then test X = 1 in the nesting
regression model where 7-2 has been replaced by its estimate. If the procedure
does not reject X = 1, Model M1 will be validated.
Cox's test Another general specification test for testing Ml relies on the modified
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likelihood ratio
"Pesaran (1974) gives detailled computations for Cox's test in the case of nornested linear
regression models.
''For instance, the Fisher test in an embedding model is actually an encompassing-type test on
the conditional mean parameters, see Mizon and Richard (1986).
254 LAVERGNE
criminate between models should rely on a pair of tests. It is possible that the
procedure does not come to a clear-cut decision if the tests reject both or neither of
the null hypotheses. In contrast, in the discrimination approach, the null hypothesis
is that both models approximate equally well the unknown DGP.The two models
have a symmetric role, and the outcome of the selection test indicates if one of the
competing models, and which one if any, dominates the other one.
The divergence between dicrimination and specification tests can be simply
illustrated using Atkinson's coumpound model. In specification analysis, one tests
successively that the mixing parameter X is equal to zero or one. In contrast the
discrimination procedure would be based on testing that the value of the mixing
parameter X is equal to a mid-point ,A corresponding to similar degrees of fit of the
models. Atkinson (1970) first suggests the latter approach.20 He proposes the value
of ,A = 112 for the mid-point, though this particular value is strongly criticized
for its arbitrariness in the discussion of Atkinson's paper. Indeed, the value of the
mid-point should depend on the competing models. On this ground, it is possible
to build procedures that test if the separate models provide similar degrees of fit t o
the data, see Vuong (1989b) for some related results.
-- - -
''That is, the two hypotheses Hf and H, are considered unsymrnetri&lly, the hypothesis H,
serving only to indicate the type of alternative for which high power is required. Cox (1962, p. 407).
201nhis article, Atkinson formally distinguishes the specification problem from the discrimination
problem and separately investigates each of them.
SELECTION OF REGRESSORS IN ECONOMETRICS 255
Here only three outcomes are possible. Moreover a consistent test ensures that if
one model dominates the other, it will be chosen with asymptotic probability one.
This is in particular the case when the DGP is included in one of the model. Thus,
though models are generally assumed misspecified at the outset, the procedure will
actually select the correct model if one of the models under consideration is correctly
specified.
As the empirical likelihood ratio is a consistent estimator of the difference
in discrepancies, it is a natural statistic to test Ho against Hi and Hz. Vuong
(1989a) shows that the behavior of this statistic depends on the pseudetrue val-
ues Of = arg max El, [loggi(ylx, &)I, i = 1,2. Specifically, under general regularity
conditions, we have:
- 6
Here necessary and sufficient conditions under which the asymptotic fi-variance of the test
statistic is null are precisely determined. In Cox's test, the non-nullity of the &asymptotic
variance is a maintained hypothesis, see White (1982).
SELECTION OF REGRESSORS IN ECONOMETRICS 257
metric estimation methods have the additional advantage to take this peculiarity
into account.22
The discrepancy due to approximation is
min E [Y - g ( ~ ) ]=
2 E [Y - r(x)12,
gEP
compare
+
E [Y - r,(x)12 = E [Y- r(x)12 E [rn(X) - r(x)12
across competing regresions, where r,(.) is some consistent estimator of r(-).23 This
penalizes complexity as E [r,(X) - r ( x ) I 2 generally depends on the dimension of
X . The asymptotic equivalence of the two discrepancies measures is ensured if the
last term converges to zero, i.e. r, converges in L2 to the regression function. But
this is exactly the consistency concept used in nonparametric estimation, see e.g.
Stone (1977). More surprising is that this consistency fails to hold even for the
least-squares estimator in the X-random case (ibid.).
Most cited work use kernel estimators. These estimators depend on the choice
of a kernel function K ( . ) and of an asymptotically vanishing smoothing parameter
h, called the bandwidth. Kernel estimators of regression functions typically have a
rate of convergence lower than parametric ones and equal to a
+ co,where p
is the dimension of X . We refer to Bierens (1987) or Hardle (1990) for a detailled
presentation and properties of kernel estimators.
Criteria and goodness-of-fit measures Let us denote r,,;(.) the regression es-
timator in which the ithobservation is left out. A natural cross-validation criterion
''However some nonparametric estimation methods have been explicitely tailored to deal with
fixed regressors.
23Stone (1977) note this equality for nearest-neighbor estimators. It is easily seen that it is
generally true.
LAVERGNE
where w(Xi) is a known weight function with compact support (included in the
support of the regressors density). Cheng and Tong (1993) studies the first-order
asymptotic expansion of C V as an estimator of residual variance in a general time
series context. Based on C V , one can build goodness-of-fit measures that estimate
the fraction of the total variance of Y explained by the nonparametric regression on
X . Doksum and Samarov (1995) propose
They study its first order-expansion as well as variants of it. They also propose es-
timates of the measure of relative importance of a subset Xp of X, i.e.
where v,(.) and fn (a) are respectively a nonparametric estimator of the conditional
variance of Y upon X and of the density of X . They show that Tn is consis-
tent in L1 for the residual variance under general conditions allowing for dependent
observations and for several nonparametric methods. They subsequently derive a
nonparametric finite-sample analysis-of-variance decomposition, which leads t o con-
sider
as a goodness-of-fit measure with range from zero to one. Similarly, one can derive
consistent estimates of yp based on integral estimators.
In the context of autoregression, Auestad and Tjostheim (1994) propose cross-
validation estimates of the expected overall discrepancy E [Y - r,(x)12 and suggest
a procedure to select the number of significant lags.
SELECTION OF REGRESSORS IN ECONOMETRICS 259
for automatic choice of the bandwidth. See Yao and Tong (1994) for dependent
observations, and Cheng and Tong (1992) and Vieu (1996) for autoregression order
choice.
Consider now two nested sets, with X2 = (XI, 2 ) . Then clearly E [Y - r2I2 <
E [Y - r112, so that the only possible alternative to Ho is Hz. When Ho is not
rejected, one typically retains the smallest model, i.e. one invokes parsimony so as
to discriminate between the two competing models. Testing Ho could be entertained
by using differences in mean of squared residuals. But this difference has a fi-
degenerate limit distribution under Ho in the nested case. Because of the degeneracy
260 LAVERGNE
problem, other null hypotheses have been considered. Some researchers consider
In the nested case, this hypothesis is intuitive and meaningful. To see that Hois an
equivalent formulation of the null hypothesis Ho,note that
this topic, see also White and Hong, 1993). He suggests that his tests can serve for
testing the relevance of some regressors. The resulting tests however, are designed
to evaluate the condition E [(Y - rl(X1))Q(X2)] = 0, with known Q(.). This is
implied by, but not equivalent to H0.Gozalo's test (1993) is a particular CM test
based on the squared differences between the two estimated regression functions a t
some fixed points (xli,xzi). The testing procedure is made consistent against all
alternatives by randomly searching over values (xli, xzi) while letting their number
increases a t an approriate rate. The main weakness of random search algorithms
is that, for finite and even large sample, the distribution of the statistic may be
far away from its theoretical limit, leading to overrejections, see the Monte-Carlo
experiments in Gozalo (1993). Lewbel (1995) proposes to take as a test statistic the
supremum of a growing collection of CM tests statistics t o obtain consistency against
all alternatives. The asymptotic null distribution is then approximated through a
bootstrap procedure. Lewbel do not explicitely consider selection of regressors in
his paper but (as pointed out by a referee) his procedure seems applicable to this
problem. Alternatively, Samarov (1991) suggests t o test
where w(-) is a positive weight function. This null hypothesis is indeed equivalent to
H~as soon as the support of the regressors is included in the one of w(.). Estimation
of the latter expectation through kernel estimators has been studied by several
authors. All these estimators share a common rate of convergence, namely nh;:i2,
where p2 = dim X 2 and hz,, is the bandwidth used in the estimation of r2(X2).Aiit-
Sahalia, Bickel and Stoker (1994) and Gozalo (1995) independently study empirical
analogs of the type
where rjn(.) is the kernel estimator of rj(.) with bandwidth hjtn. They encounter
a situation already mentionned in Samarov (1991), namely that the squared bias
of the estimator dominates its variance, so that a test requires a bias correction.
Fan and Li (1996) and Lavergne and Vuong (1995) note that E[(rz - rl)2w(X2)]=
E [(Y - rl)E(Y - rllX2)w(X2)]. When w(X2) is the density of X2, Fan and Li
(1996) propose the sum-type estimator
where Kn(.) = h;:l<(./hzn). The resulting test statistic does not require any bias
correction, has nh;?i2-rate of convergence and is asymptotically normal. A properly
rescaled version of this statistic provides a consistent one-sided normal test of Ho.24
However, Fan and Li's procedure generally impose oversmoothing of the null regres-
sion model relative to the complete one more than implied by the dimensionnality
of the regressors' sets. Lavergne and Vuong (1995) propose a modification of this
test statistic with a similar behavior that has not this drawback. They also show
that the test has non-trivial power against local alternatives of the type
For testing the significance of discrete regressors, Lavergne (1997) proposes an anal-
ogous testing procedure. In this case, similar amount of smoothing is applied to the
null regression model and to the complete one.
if none of these is nested in the other one. For testing Ho,Lavergne and Vuong
(1996b) consider the criteria
n
C [Y;- rn,i(xi)12I [fn(Xi) > bn]
MSEn = ( l / n )
i=l
where I [fn(Xi) > bn] is a stochastic trimming function, depending on an a s y m p
totically vanishing bn, and fn(.) is the kernel estimator of the density of X . They
show that the difference between criteria MSEin, i = 1,2,has an asymptotic fi-
normal distribution. Moreover they show that under Ho,this limiting distribution
is degenerate if and only if
E[r2(X2)1x11= r l (XI)
or
E[r1(X1)1x21= r2(X2).
We are then back to a situation very similar to the one already encountered in
likelihood contexts. When the two sets of regressors are nested, i.e. X 2 = (XI, Z2),
the fi-asymptotic distribution of MSE2, - MSErn cannot be used to built a test,
because (D) automatically holds, as E [E(YIX2)1X1] = E ( Y 1x1). One should then
consider a higher rate of convergence than J?t. In the case of nonnested competing
sets of regressors, i.e. X I = (W, 21) and X2 = (W, Zz), (D) does not always hold.
In case where (D) does not hold, Lavergne and Vuong provide a testing procedure
for Ho.But it may be that e.g. E(YIX1) = E(YIW),so that the comparison of
nonnested sets X1 and X2 is equivalent t o the comparison of nested sets W and X2.
Testing such an occurence then requires a test for nested models.
SELECTION OF REGRESSORS IN ECONOMETRICS 263
and
Alternatively, Delgado, Li and Stengos (1995) consider the mixture regression model
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see Gourieroux and Monfort (1994) for a similar definition in semiparametric regres-
sion models. Clearly the solution of this problem is E [E (Y 1x2) (XI].
Model 2 will
then encompass Model 1 if
choice between X1 and X 2 would require two tests, that would lead to four different
outcomes. Moreover, it can happen that neither HI nor HZ holds, or that none of the
models encompasses the competing one, so that such a procedure would not allow to
discriminate between the competing models. It is also noteworthy that either H I or
H2, and H, or its counterpart, each implies (D). Therefore, Lavergne and Vuong's
(1996b) testing procedure applies in situations where neither the artificial nesting
approach nor the encompassing approach could be applied.
6 Conclusion
In the previous sections, we have used the discrimination framework to unify selec-
tion of regressors in parametric or nonparametric regression models, and to derive
model selection criteria as well as discrimination testing procedures. This framework
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fulfills at least two major requirements for a model selection approach in economet-
rics, as recommended by Nakamura, Nakamura and Duleep (1990). First, one of
the "maintained hypothesis" of the approach is that the models among which one
wants to discriminate are all approximating models and may not contain the true
data generating process. This is in line with the modern econometric practice which
considers that virtually all economic models are approximations and misspecified to
some greater or lesser degree. Model selection criteria and tests can then be derived
without any parametric assumption on the DGP. The approach thus allows to select
not only among misspecified models, but also among correct models, in the sense
that several models can be correct a t the same time, see the case of linear mod-
els with multivariate normal variables. Selection among nonparametric regression
models also comes t o selection among correct models since each represents the con-
ditional expectation of the dependent variable given a particular set of explanatory
variables.
Second, the approach allows explicit reference t o the modelling goals in the
discrimination strategy, through the choice of the discrepancy measure. For instance,
the interest may focus on the predictive ability of the model, see e.g West (1996), or
on the mean squared error of estimation for parameters. The approach can in some
cases serve for the choice of the estimation method, but it is not akin to an estimation
framework. Recent work has considered the case where the discrepancy used for
discrimination is different from the one used in estimation, see e.g. Rivers and
SELECTION OF REGRESSORS IN ECONOMETRICS
Vuong (1990), Sin and White (1996), so that estimation and selection are explicitely
treated as separate problems.25
The discrimination approach has been long brought into conflict with specifi-
cation analysis. We hope that this review article has made clear that they are not
potential rivals. Specification tests aim to check if a model is not inconsistent with
some specific aspects of the data. However, it does not provide any basis for judging
the costs, in terms of goodness of the approximation, of the specification problems
that are detected. Discrimination procedures aim to select the best (or the less
worst) of the models in terms of the chosen measure, but does not provide any indi-
cation on possible misspecifications of the preferred model. Confrontation between
the two approaches shed light on a particular feature of discrimination tests. While
in a parametric context, nonnested models are defined through the approximating
families in specification analysis, see Pesaran (1987), they are defined through the
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best approximating families in the dicrimination approach and therefore one should
test if models are nested or not, see Vuong (1989a). In a nonparametric context, we
get a similar situation.
The general discrimination framework should be particularly useful for model
selection in econometrics, both on theoretical and practical grounds. From a theoret-
ical viewpoint, it allows t o unify the various procedures and may help in proposing
new ones. The overview given in this paper can suggest some directions for research
on this domain. In particular, some recent work focuses on application of resampling
techniques, as cross-validation or bootstraping, t o model selection criteria (see Shao,
1993 and 1996). Use of these method for implementation of discrimination testing
procedures still largely need t o be study. The literature about selection of regresors
in nonparametric models is also quite recent. Much remains t o be done both from
a theoretical and a data analytic viewpoint, as detailled in Auestad and Tjostheim
(1994). For the most part of our review, we have deliberately dealt with i.i.d. con-
texts. A considerable work has been done in the field of time series, but model
selection under nonstationnarity has been relatively less studied, see e.g. Potscher
(1989) and the references therein. It is also worth mentioning that multiple compari-
son techniques may prove useful in a context where one has usually t o select among a
collection of potential models, on this see Gupta and Panchapakesan (1979). Maybe
"See Learner (1983) for a critical viewpoint on confusion between model selection and estimation
problems.
266 LAVERGNE
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SELECTION OF REGRESSORS IN ECONOMETRICS 273
APPENDIX
Derivation of MSEP
Now, xpo - XpP,' = MpXPo and XPP,' - xPPp= Pp(XPo - y) = -Ppu. Then, denoting
uo = yo - XPo,
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-(L
L; (Bc) k! L;(B8) - (1/2)(Bc- 8 ),a2Lf,(8*)
8*),
8888'
and taking expectation, we get
Combining this with the first part of (8), we get the second part of (8).