SPECIFICATION

The process in the construction of Econometric Models during the selection of the Independent or Exogenous Variables by which we attempt to provide the best and most complete explanation of the Dependent or Endogenous Variable. Correct model specification results in a representation of the "true" physical, economic, or behavioral relationships described by the model's structure. Mis-specified models generally result from the inclusion of irrelevant variables in the model's structure or relevant variables omitted from the model. Another model mis-specification can occur when the model is represented by a linear relationship when in fact the true relationship is nonlinear, or vice versa.