Regression Models with Data‐based Indicator Variables*

Abstract

OLS estimation of an impulse-indicator coefficient is inconsistent, but its variance can be consistently estimated. Although the ratio of the inconsistent estimator to its standard error has a tdistribution, that test is inconsistent: one solution is to form an index of indicators. We provide Monte Carlo evidence that including a plethora of indicators need not distort model selection, permitting the use of many dummies in a general-to-specific framework. Although White's (1980) heteroskedasticity test is incorrectly sized in that context, we suggest an improvement. Finally, a possible modification to impulse 'intercept corrections' is considered.JEL classifications: C51, C22.

A note comparing support vector machines and ordered choice models’ predictions of international banks’ ratings

“…7 Hendry's analysis is within the context of modelling inflation using time-series data. Hendry and Santos (2005) discuss the potential advantages of using such an index. 7 Ordered choice models could not be estimated when the lag length exceeded four.…”

On the time-varying relationship between EMU sovereign spreads and their determinants

“…Second, in line with the recommendation of Hendry and Santos (2005), the algorithm automatically detects and corrects for any outlying observations, defined by estimated residuals exceeding 3.5 standard deviations, via impulse dummy variables. Outliers may reflect the impact of events which are not captured by our explanatory variables, such as bailout news, or news about country-specific political developments.…”

Inflation dynamics and food prices in Ethiopia

“…The standard options in Autometrics are then used to reduce the general models to specific models. We use indexes of the impulse dummies with weights based on their coefficients in the general models to avoid distorting misspecification tests (Hendry and Santos, 2005). We also include variables of interest in the specific models for illustrative purposes, even though they were removed by Autometrics.…”