"Regression Models with Data-based Indicator Variables"
David F. Hendry and Carlos Santos
Economics Department, Oxford University
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 t-distribution, 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