Model Selection in a System of Simultaneous Equations Model

Abstract

The AIC for a system of simultaneous equations model (SAIC) with the errors both serially and contemporaneously correlated is proposed to select the most appropriate system of the models. Our approach consists of two stages. Firstly, the Prais–Winsten transformation is extended to correct the second-order autocorrelation problem and to recover the lost two observations in a simultaneous equations model. Secondly, the log-likelihood function of the multivariate model can be applied to construct the SAIC for the transformed model. The system with the minimum value of SAIC can be classified to the “best” system of the model.

Keywords:

• Second-order autocorrelation correction
• System of simultaneous equations AIC (SAIC)
• Variable selection

Mathematics Subject Classification:

• Primary 62M10
• Secondary 91G70