School of Economics

2015 Discussion papers


School of Economics Discussion Paper 15/04


A Practical, Universal, Information Criterion
over Nth Order Markov Processes


Sylvain Barde
University of Kent


January 2015

Abstract:

The recent increase in the breath of computational methodologies has been matched with a corresponding increase in the difficulty of comparing the relative explanatory power of models from different methodological lineages. In order to help address this problem a universal information criterion (UIC) is developed that is analogous to the Akaike information criterion (AIC) in its theoretical derivation and yet can be applied to any model able to generate simulated or predicted data, regardless of its methodology. Both the AIC and proposed UIC rely on the Kullback-Leibler (KL) distance between model predictions and real data as a measure of prediction accuracy. Instead of using the maximum likelihood approach like the AIC, the proposed UIC relies instead on the literal interpretation of the KL distance as the inefficiency of compressing real data using modelled probabilities, and therefore uses the output of a universal compression algorithm to obtain an estimate of the KL distance. Several Monte Carlo tests are carried out in order to (a) confirm the performance of the algorithm and (b) evaluate the ability of the UIC to identify the true data-generating process from a set of alternative models.


JEL Classification: B41; C15; C52; C63

Keywords: AIC; Minimum description length; Model selection

To download the file in pdf format click here.

 

School of Economics, Keynes College, University of Kent, Canterbury, Kent, CT2 7NP

Undergraduate enquiries: +44 (0) 1227 827497, Postgraduate enquiries: +44 (0) 1227 827440 or email us

Last Updated: 12/03/2015