To capture location shifts in the context of model selection, we propose selecting significant step indicators from a saturating set added to the union of all of the candidate variables. The null retention frequency and approximate non-centrality of a selection test are derived using a ‘split-half’ analysis, the simplest specialization of a multiple-path block-search algorithm. Monte Carlo simulations, extended to sequential reduction, confirm the accuracy of nominal significance levels under the null and show retentions when location shifts occur, improving the non-null retention frequency compared to the corresponding impulse-indicator saturation (IIS)-based method and the lasso.
Castle, J. L., Doornik, J. A., Hendry, D. F. and Pretis F. (2015). `Detecting Location Shifts During Model Selection by Step-indicator Saturation’. Econometrics, 3(2), 240–264