Simulation Encompassing: Testing Non-Nested Hypotheses

26 Pages Posted: 2 Dec 2008

See all articles by Maozu Lu

Maozu Lu

University of Southampton - Faculty of Law, Arts and Social Sciences

Grayham E. Mizon

University of Southampton - Division of Economics

Chiara Monfardini

University of Bologna - Department of Economics; IZA Institute of Labor Economics

Date Written: 0000

Abstract

This paper considers simulation-based procedures to compute the Wald encompassing and the Cox test statistics for non-nested models. These simulation estimation procedures are applied to both the encompassing contrast and its covariance matrix in the case of a Wald non-nested test statistic, and both the numerator and the denominator in the Cox test statistic. The proposed procedures are illustrated by the example of comparing a linear with a log-linear model. Monte Carlo studies are conducted for both examples and the results indicate that with simulated covariance matrices, the small sample behaviour of both test statistics is close to that of their asymptotic distributions.

Suggested Citation

Lu, Maozu and Mizon, Grayham E. and Monfardini, Chiara, Simulation Encompassing: Testing Non-Nested Hypotheses (0000). Oxford Bulletin of Economics and Statistics, Vol. 70, Issue s1, pp. 781-806, December 2008, Available at SSRN: https://ssrn.com/abstract=1307312 or http://dx.doi.org/10.1111/j.1468-0084.2008.00530.x

Maozu Lu (Contact Author)

University of Southampton - Faculty of Law, Arts and Social Sciences ( email )

Southampton, SO17 1BJ
Great Britain

Grayham E. Mizon

University of Southampton - Division of Economics ( email )

Southampton, SO17 1BJ
United Kingdom
+44 (0)23 80 592519 (Phone)
+44 (0)23 8059 3858 (Fax)

Chiara Monfardini

University of Bologna - Department of Economics ( email )

Piazza Scaravilli 2
Bologna, 40126
Italy
0039 51 2098148 (Phone)
0039 51 221968 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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