Publication Type

Journal Article

Version

acceptedVersion

Publication Date

1-2014

Abstract

In this paper a new Bayesian approach is proposed to test a point null hypothesis based on the deviance in a decision-theoretical framework. The proposed test statistic may be regarded as the Bayesian version of the likelihood ratio test and appeals in practical applications with three desirable properties. First, it is immune to Jeffreys’ concern about the use of improper priors. Second, it avoids Jeffreys–Lindley’s paradox, Third, it is easy to compute and its threshold value is easily derived, facilitating the implementation in practice. The method is illustrated using some real examples in economics and finance. It is found that the leverage effect is insignificant in an exchange time series and that the Fama–French three-factor model is rejected.

Keywords

Bayes factor, Decision theory, EM algorithm, Deviance, Markov chain Monte Carlo, Latent variable models

Discipline

Econometrics

Research Areas

Econometrics

Publication

Journal of Econometrics

Volume

178

Issue

3

First Page

602

Last Page

612

ISSN

0304-4076

Identifier

10.1016/j.jeconom.2013.08.035

Publisher

Elsevier

Additional URL

https://doi.org/10.1016/j.jeconom.2013.08.035

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