Most Powerful Test against High Dimensional Local Alternatives

42 Pages Posted: 26 Feb 2021

See all articles by Yi He

Yi He

University of Amsterdam - Amsterdam School of Economics (ASE)

Sombut Jaidee

Monash University - Department of Econometrics & Business Statistics

Jiti Gao

Monash University - Department of Econometrics & Business Statistics

Date Written: February 26, 2021

Abstract

We develop a powerful quadratic test for the overall significance of many covariates in a dense regression model in the presence of nuisance parameters. By equally weighting the sample moments, the test is asymptotically correct in high dimensions even when the number of coefficients is larger than the sample size. Our theory allows a non-parametric error distribution and weakly exogenous nuisance variables, in particular autoregressors in many applications. Using random matrix theory, we show that the test has the optimal asymptotic testing power among a large class of competitors against local alternatives whose coordinates are dense in the eigenbasis of the high dimensional sample covariance matrix among regressors.  The asymptotic results are adaptive to the covariates’ cross-sectional and temporal dependence structure and do not require a limiting spectral law of their sample covariance matrix. In the most general case, the nuisance estimation may play a role in the asymptotic limit and we give a robust modification for these irregular scenarios. Monte Carlo studies suggest a good power performance of our proposed test against high dimensional dense alternative for various data generating processes. We apply the test to detect the significance of over one hundred exogenous variables in the FRED-MD database for predicting the monthly growth in the US industrial production index.

Keywords: High-dimensional linear model, hypothesis testing, uniformly powerful test, nuisance parameter, random matrix

JEL Classification: C12, C21, C55

Suggested Citation

He, Yi and Jaidee, Sombut and Gao, Jiti, Most Powerful Test against High Dimensional Local Alternatives (February 26, 2021). Available at SSRN: https://ssrn.com/abstract=3793480 or http://dx.doi.org/10.2139/ssrn.3793480

Yi He (Contact Author)

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Roetersstraat 11
Amsterdam, North Holland 1018 WB
Netherlands

HOME PAGE: http://yihe.nl

Sombut Jaidee

Monash University - Department of Econometrics & Business Statistics

900 Dandenong Rd
Caulfield, Victoria 3145
Australia

Jiti Gao

Monash University - Department of Econometrics & Business Statistics ( email )

900 Dandenong Road
Caulfield East, Victoria 3145
Australia
61399031675 (Phone)
61399032007 (Fax)

HOME PAGE: http://www.jitigao.com

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