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Increasing the power of moment-based tests

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  • Woutersen, Tiemen

Abstract

This paper shows how to increase the power of the Hansen (1982) test for the case where only a subset of the exclusion restrictions is used. The ‘ignored’ exclusion restrictions are used to derive a new estimator for the covariance matrix, which has a different probability limit than the usual one when the model is false. If the null hypothesis is true, then the proposed test has the same distribution as the existing ones in large samples. If the hypothesis is false, then the proposed test statistic is larger with probability approaching one as the sample size increases in several important examples. Simulations show that the improvement can be substantial. As the Hansen (1982) test is very popular in empirical work, including testing the validity of Euler equations, we expect the current results to be useful as well.

Suggested Citation

  • Woutersen, Tiemen, 2025. "Increasing the power of moment-based tests," Journal of Econometrics, Elsevier, vol. 252(PB).
    • Handle: RePEc:eee:econom:v:252:y:2025:i:pb:s0304407625000624
    DOI: 10.1016/j.jeconom.2025.106008
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    References listed on IDEAS

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    1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
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    8. de Jong, Robert M. & Woutersen, Tiemen, 2011. "Dynamic Time Series Binary Choice," Econometric Theory, Cambridge University Press, vol. 27(4), pages 673-702, August.
    9. Woutersen, Tiemen & Hausman, Jerry A., 2019. "Increasing the power of specification tests," Journal of Econometrics, Elsevier, vol. 211(1), pages 166-175.
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    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies

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