The encompassing principle and evaluation of econometric models

Lu, Maozu (1991) The encompassing principle and evaluation of econometric models. University of Southampton, Doctoral Thesis.

Abstract

Encompassing, as a general principle of econometric model building and evaluation, has been suggested by, e.g., Hendry and Richard (1982), Mizon and Richard (1986). The recent development of encompassing can be found in Hendry and Richard (1990).

The purpose of this research is to further investigate the structure and properties of encompassing, its relationship with other testing framework, e.g. m-testing framework, and its application in evaluating simultaneous equation systems.

In this thesis, it has been shown that encompassing as a general testing principle is, under some regularity conditions, equivalent to the conditional moment testing framework (m-testing) suggested by Newey (1985) and Tauchen (1985). It also has been shown that the equivalence of two econometric models in the sense of encompassing has the same connotation as that established under the Kullback criterion (Kullback (1959)).

The applications of encompassing to evaluating non-nested models that are part of simultaneous equations systems can be found in Chapter 5. The forecasting encompassing is discussed in Chapter 6.

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