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Simulation-Based Finite and Large Sample Tests in Multivariate Regressions

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  • DUFOUR, Jean-Marie
  • KHALAF, Lynda

Abstract

In the context of multivariate linear regression (MLR) models, it is well known that commonly employed asymptotic test criteria are seriously biased towards overrejection. In this paper, we propose a general method for constructing exact tests of possibly nonlinear hypotheses on the coefficients of MLR systems. For the case of uniform linear hypotheses, we present exact distributional invariance results concerning several standard test criteria. These include Wilks' likelihood ratio (LR) criterion as well as trace and maximum root criteria. The normality assumption is not necessary for most of the results to hold. Implications for inference are two-fold. First, invariance to nuisance parameters entails that the technique of Monte Carlo tests can be applied on all these statistics to obtain exact tests of uniform linear hypotheses. Second, the invariance property of the latter statistic is exploited to derive general nuisance-parameter-free bounds on the distribution of the LR statistic for arbitrary hypotheses. Even though it may be difficult to compute these bounds analytically, they can easily be simulated, hence yielding exact bounds Monte Carlo tests. Illustrative simulation experiments show that the bounds are sufficiently tight to provide conclusive results with a high probability. Our findings illustrate the value of the bounds as a tool to be used in conjunction with more traditional simulation-based test methods (e.g., the parametric bootstrap) which may be applied when the bounds are not conclusive.

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File URL: http://hdl.handle.net/1866/334
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Bibliographic Info

Paper provided by Universite de Montreal, Departement de sciences economiques in its series Cahiers de recherche with number 2000-10.

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Length: 24 pages
Date of creation: 2000
Date of revision:
Handle: RePEc:mtl:montde:2000-10

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Keywords: multivariate linear regression; seemingly unrelated regressions; uniform linear hythesis; Monte Carlo test; bounds test; nonlinear hythesis; finite same test; exact test; bootstrap;

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