Publication Type

Journal Article

Version

submittedVersion

Publication Date

3-2022

Abstract

A new Wald-type statistic is proposed for hypothesis testing based on Bayesian posterior distributions under the correct model specification. The new statistic can be explained as a posterior version of the Wald statistic and has several nice properties. First, it is well-defined under improper prior distributions. Second, it avoids Jeffreys–Lindley–Bartlett’s paradox. Third, under the null hypothesis and repeated sampling, it follows a χ2" role="presentation" style="box-sizing: border-box; margin: 0px; padding: 0px; display: inline-block; line-height: normal; font-size: 16.2px; word-spacing: normal; overflow-wrap: normal; white-space: nowrap; float: none; direction: ltr; max-width: none; max-height: none; min-width: 0px; min-height: 0px; border: 0px; position: relative;">χ2 distribution asymptotically, offering an asymptotically pivotal test. Fourth, it only requires inverting the posterior covariance for parameters of interest. Fifth and perhaps most importantly, when a random sample from the posterior distribution (such as MCMC output) is available, the proposed statistic can be easily obtained as a by-product of posterior simulation. In addition, the numerical standard error of the estimated proposed statistic can be computed based on random samples. A robust version of the test statistic is developed under model misspecification and inherits many nice properties of the new posterior statistic. The finite sample performance of the statistics is examined in Monte Carlo studies. The method is applied to two latent variable models used in microeconometrics and financial econometrics.

Keywords

Decision theory, Hypothesis testing, Latent variable models, Posterior simulation, Wald test.

Discipline

Econometrics

Research Areas

Econometrics

Publication

Journal of Econometrics

First Page

1

Last Page

48

ISSN

0304-4076

Identifier

10.1016/j.jeconom.2021.11.003

Publisher

Elsevier: 24 months

Copyright Owner and License

Authors

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