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A Bayesian Extension of the J-Test for Non-Nested Hypotheses

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  • Moheb Ghali
  • John M. Krieg
  • K. Surekha Rao
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    Abstract

    It is a common practice to use the Davidson and MacKinnon's J-test in empirical applications to test non-nested model specifications. However, when the alternate specifications fit the data well the J- test may fail to distinguish between the true and false models: the J-test will either reject, or fail to reject both specifications. We show that it is possible to use the information generated by the J-test and combine it with the Bayesian posterior odds approach that would yield an unequivocal and acceptable solution for non-nested hypotheses. We show that the approximations of Schwarz and Bayesian Information Criterion based on classical estimates for the J- test yield the Bayesian posterior odds without any need for the specification of the prior distributions and the onerous Bayesian computations.

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    File URL: http://www.jqe.co.in/journals/JQE_v9_n1_2011_p4.pdf
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    Bibliographic Info

    Article provided by The Indian Econometric Society in its journal Journal of Quantitative Economics.

    Volume (Year): 9 (2011)
    Issue (Month): 1 ()
    Pages: 53-72

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    Handle: RePEc:jqe:jqenew:v:9:y:2011:i:1:p:53-72

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    1. Ben S. Bernanke & Henning Bohn & Peter C. Reiss, 1985. "Alternative Nonnested Specification Tests of Time Series Investment Models," NBER Technical Working Papers 0049, National Bureau of Economic Research, Inc.
    2. McAleer, Michael, 1995. "The significance of testing empirical non-nested models," Journal of Econometrics, Elsevier, vol. 67(1), pages 149-171, May.
    3. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
    4. Michael C. Lovell, 1963. "Seasonal Adjustment of Economic Time Series and Multiple Regression," Cowles Foundation Discussion Papers 151, Cowles Foundation for Research in Economics, Yale University.
    5. Godfrey, L. G. & Pesaran, M. H., 1983. "Tests of non-nested regression models: Small sample adjustments and Monte Carlo evidence," Journal of Econometrics, Elsevier, vol. 21(1), pages 133-154, January.
    6. Pesaran, M. H. & Weeks, M., 1999. "Non-nested Hypothesis Testing: An Overview," Cambridge Working Papers in Economics 9918, Faculty of Economics, University of Cambridge.
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