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Mle Testing
Mle Testing
The Trilogy
Application: Test for Heteroskedasticity
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
Basic Concepts
Z f (y; ), <K .
is a vector of K parameters.
is the parameter space: set of values can take.
A hypothesis is a statement about . The goal is to learn
something about the validity of the hypothesis, based on a sample.
If H0 : 0 , the hypothesis is nested if 0 . In general,
they are restriction hypotheses (eg., = 0, = <, 0 = {0}).
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
The rejection region is the set of all value the test statistic
can take for which the null is rejected.
A test is a test statistic combined with a rejection region.
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
Non-linear Hypothesis
H0 : h() = 0, h() : <K <r ,
h() is a vector of r restrictions on the K parameters.
In this case = <k , and
0 = | h() = 0 , 0
so the hypothesis is nested.
Let D(), be an (r k) matrix with (i, j) element:
D()ij =
hi ()
j
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
D() =
Walter Sosa-Escudero
1 1 0
0 3 2
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
Three Tests
Assume Vn is a consistent estimator of J. Consider the following
test statistics for H0 : h(0 ) = 0.
1
Likelihood Ratio:
"
z) l(R ; z)
l(;
LR = n 2
n
n
2
Wald:
h
i1
n ()
1 D()
0
0 D()V
h()
W = n h()
s(R
n
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
h() = 0 (W)
The shadow price of imposing the restriction is zero:
= 0.
From the first FOC:
s(R ; z) D(R )0 = 0
Since (H()) = r, then s(R )
= 0 (score or LM).
The idea is to reject H0 when LR,W or LM are large.
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
A graphical representation
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
The plan:
1
we
We will start with the Wald test since it depends on :
have already proved its asymptotic properties, in particular
n( 0 ) N (0, J 1 )
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
Wald Test
h
i1
0 D()V
1 D()
0
h()
W = n h()
n
around 0 :
Take a mean value expansion of h()
= h(0 ) + D()
0
h()
where is a mean value between and 0 . Again, consistency
guarantees the exactness of the approximation.
Under H0 : h(0 ) = 0
= D()
n 0
n h()
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
By asymptotic normality of
d
n h()
N 0, D(0 )J 1 D(0 )0
p
p
p
and D()
since D()
D(0 ), Vn J and 0 , by Slutzkys
theorem:
d
1 D()
0
N 0, D()V
n h()
n
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
n(R 0 ) N (0, V (0 )1 )
, where V (0 )1 J 1 J 1 D0 [DJ 1 D0 ]1 DJ 1 ,
D D(0 )
2
1
s(0 ) d
' R(0 )1 DJ 1
N (0, R(0 )1 ),
n
n
with R DJ 1 D0 .
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
R )0
1 D(
n
n h(R )
Walter Sosa-Escudero
= 0
(1)
= 0
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
H()
1
1
s(R ; z) = s(0 ; z) + n
(R 0 )
n
n
n
1
= s(0 ; z) n J (R 0 ) (Asymptotically, Why?) (2)
n
R 0 )
n h(0 ) + n D()(
=
n D(0 )(R 0 )
(Asymptotically, Why?) (3)
n h(R ) =
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
Now replace (2) and (3) in (1) and use the fact that under H0
p
D(R ) D(0 ).
R 0 ) 1 D0
= 0
1 s(0 ; z
n
J
(
n
n
n D(R 0 ) = 0
1
n (R 0 ) = A s(0 ; z)
n
with A J 1 J 1 D0 R1 DJ 1
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
1
d
n(R 0 ) = A s(0 ; z) N (0, A J A0 )
n
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
LM/Score
1 0 1
s(R ) V (R ) s(R )
n
From the FOC of the restricted MLE problem:
LM =
1
1
=0
s(R ; z) D(R )0
n
n
Replacing:
0
d
D(R )V (R )1 D(R )0
' R(0 )
2 (r),
n
n
n
n
d
n
since /
N (0, R()1 ), and it is a normed quadratic form.
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
LR Test
h
i
z) l(R ; z)
LR = 2 l(;
0
+ s()
0 R + 1 R H()
R
l(R ) = l()
2
0
1
R
=
R H()
(Why?)
l(R ) l()
2
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
LR = n R
H()
n R
n
0
'
(Why?)
n R I(0 ) n R
Recall
s(0 ; z)
n ( 0 ) ' J 1
n
n (R 0 ) '
J 1 J 1 D0 R1 DJ 1
s(0 ; z)
s(0 )
n R ' J 1 D0 R1 DJ 1 = J 1 D0
n
n
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
Replacing above:
LR '
'
0
0
DJ 1 JJ 1 D0
n
n
0
0
DJ 1 D0
n
n
d
' LM 2 (r)
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
h
i1
0 D()V
1 D()
0
n h()
h()
n
1
n 0 D(0 )Vn1 D(0 )0
LM
1
s(R ; z)0 V (R )1 s(R ; z)
n
s(R ; z)0 1 s(R ; z)0
V ( R )
= n
n
n
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
n
n
|
{z
}
h
6=0
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
Consistency
Under H0 , W, LM and LR have asymptotic 2 (r) distribution.
For a level , the acceptance region is [0, z ], where z is the
1 quantile of 2 (r), a finite number.
Hence, under our HA , W, LM and LR , hence lie outside
the acceptance region wpt1: they are consistent.
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
Setup:
yi = x0i + ui
1
Homoskedasticity: H0 : 2 = 3 = = p = 0
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
In this setup
= (, 1 , 2 , . . . , p )0 .
The null of homskedasticity, H0 : 2 , . . . , p = 0 involves a
subvector of , say, all the other parameters are free.
The LM test can be simplified in this situation
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
0 Ir
1
2
{z
h()
2o = 0
}
with D() = [0 Ir ].
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
Similarly
s1 ()
s()
,
s1 ()
Vn () =
V11 V12
V21 V22
Walter Sosa-Escudero
,
Vn1 ()
V 11 V 12
V 21 V 22
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
1
1
Result (Theil, 1971, pp. 18): V 22 = V22 V21 V11
V12 .
1
In particular, if V21 = 0 = V 22 = V22
.
FOC of the restricted MLE problem:
as:
s1 (1 , 2o )
s ( , )
2 1 2o
2
Walter Sosa-Escudero
in this case, R = (1 , 2o ) so
=
=
=
2o
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
(Yi Y )2 =
Yi2 N Y 2 =
X
Yi2 (1/N )(
Yi )2
In matrix form:
SCE = Y 0 Y (i0 Y )2 /N, con i = (1, 1, . . . , 1)0
But:
Y 0 Y = Y 0 X(X 0 X)1 X 0 X(X 0 X)1 X 0 Y = Y 0 X(X 0 X)1 X 0 Y
|
{z
}|
{z
}
(X 0 )
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
ESSg,z
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
X 1
(yi x0i )xi
i2
1 X h0i
1 X h0i
zi
zi
2
hi
2
h2i
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
Let 0 and 0 denote the true values under the null. Also note
that 0 = (1 , 0, . . . , 0)0 .
From the previous result, it is easy to check that J is block
diagonal, that is
2
l
J, = E
=0
when evaluated at the true values under the null. Then, since our
H0 only involves the components of , according to our previous
result, a test can be based on
LM =
1
1
s (R ; z, x
)0 J
s (R ; z, x
)
n
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
in this case?
What it
2
1 h0 (
1 ) X
ei
z
1
i
2
l(; x
, z)
1 h0 (
1 ) X 0
J =
=
zi zi
0 =R
2
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
0 X
1 X
1 X
zi fi
zi zi0
zi fi
2
with fi e2i /
2 1 = gi 1. In matrix terms:
1
1
LM = f 0 Z(Z 0 Z)1 Z 0 f = f 0 PZ f
2
2
with f = g i, i is a vector of n ones.
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
Note
i0 g =
PZ i = i
2 = n.
e2i /
(Why?)
Then
LM
= 1/2 f 0 PZ f
= 1/2 (g i)0 PZ (g i)
= 1/2 g 0 PZ g i0 PZ g g 0 PZ i + i0 PZ i
= 1/2 g 0 PZ g n
= 1/2 g 0 PZ g (i0 g)2 /n
= 1/2 ESSg,z
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
Walter Sosa-Escudero
Basic Concepts
The Trilogy
Application: Test for Heteroskedasticity
Walter Sosa-Escudero