Financial Risk Manager Part 1
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The bias-variance tradeoff amounts to choosing between the including irrelevant variables and excluding relevant variables. Which of the following is right about the general-to-specific (GtS) model selection?
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NNikitesh
A
The appropriate variables are chosen from a pool of random variables.
B
The variables with the smallest t-statistics are excluded in the model
C
The model is re-estimated with the random variables with the smallest t-statistic.
D
None of the above
Explanation:
The general-to-specific (GtS) method starts with a large model that incorporates all appropriate variables. If there are statistically insignificant coefficients in the estimated model, the variables with coefficients having the smallest t-statistics are removed. The model is then re-estimated with the remaining independent variables. This approach systematically eliminates variables with weak statistical significance while preserving the overall model structure.
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