The Effect of Nuisance Parameters on Size and Power; Lm Tests in Logit Models

Working Paper 1997-17

Posted: 22 Jan 1998

See all articles by N. Eugene Savin

N. Eugene Savin

University of Iowa - Henry B. Tippie College of Business - Department of Economics

Allan Wurtz

Aarhus University - Department of Economics and Business Economics

Abstract

In econometrics, most null hypotheses are composite, dividing the parame ters into parameters of interest and nuisance parameters. Typically, a composite hypothesis can be tested using two or more testing procedures. Competing testing procedures are commonly compared using size-corrected powers. What is often overlooked is that the size-corrected critical value of a test can be sensitive to the set of admissible values of the nuisance parameters, and hence its size-corrected power. As a result, different choices for the admissible set can produce different conclusions about which test is best. This fact complicates the interpretation of Monte Carlo power studies because in many cases there is no natural definition of the set of admissible values. We find this fact to be crucial when choosing a Lagrange Multiplier test in the case of a logit model. A theoretical explanation for this effect is developed using large parameter asymptotics.

JEL Classification: C12, C15, C25

Suggested Citation

Savin, Nathan Eugene and Wurtz, Allan, The Effect of Nuisance Parameters on Size and Power; Lm Tests in Logit Models. Working Paper 1997-17, Available at SSRN: https://ssrn.com/abstract=54556

Nathan Eugene Savin

University of Iowa - Henry B. Tippie College of Business - Department of Economics ( email )

108 Pappajohn Building
Iowa City, IA 52242
United States
319-335-0855 (Phone)

Allan Wurtz (Contact Author)

Aarhus University - Department of Economics and Business Economics ( email )

Universitetsparken
Building 350
DK-8000 Aarhus C
Denmark
+45 8942 1133 (Phone)
+45 8613 6334 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
555
PlumX Metrics