Regression Model Specification Principles

Model specification refers to the set of variables included in the regression and the regression equation's functional form. The principles below cal guide model specification:

• The model should be grounded in cogent economic reasoning


• The functional form chosen for each variable in the regression should be appropriate given the nature of the variables


• The model should be parsimonious


• Validate the regression model assumptions before accepting them


• Apply the model using out-of-sample observations