LM-BIC Model Selection in Semiparametric Models

Abstract: This paper studies model selection in semiparametric econometric models. It develops a consistent series-based model selection procedure based on a Bayesian Information Criterion (BIC) type criterion to select between several classes of models. The procedure selects a model by minimizing the semiparametric Lagrange Multiplier (LM) type test statistic from Korolev (2018) but additionally rewards simpler models. The paper also develops consistent upward testing (UT) and downward testing (DT) procedures based on the semiparametric LM type specification test. The proposed semiparametric LM-BIC and UT procedures demonstrate good performance in simulations. To illustrate the use of these semiparametric model selection procedures, I apply them to the parametric and semiparametric gasoline demand specifications from Yatchew and No (2001). The LM-BIC procedure selects the semiparametric specification that is nonparametric in age but parametric in all other variables, which is in line with the conclusions in Yatchew and No (2001). The results of the UT and DT procedures heavily depend on the choice of tuning parameters and assumptions about the model errors.