SMU SOE Seminar (Aug 11, 2017): A New Wald Test for Hypothesis Testing Based on MCMC outputs

In this paper, a new and convenient x² wald test based on MCMC outputs is proposed for hypothesis testing. The new statistic can be explained as MCMC versioncof Wald test and has several important advantages that make it very convenient in practical applications. First, it is well-defined under improper prior distributions and avoids Jeffrey-Lindley's paradox. Second, it's asymptotic distribution can be proved to follow the x² distribution so that the threshold values can be easily calibrated from this distribution. Third, it's statistical error can be derived using the Markov chain Monte Carlo (MCMC) approach. Fourth, most importantly, it is only based on the posterior MCMC random samples drawn from the posterior distribution. Hence, it is only the by-product of the posterior outputs and very easy to compute. In addition, when the prior information is available, the finite sample theory is derived for the proposed test statistic. At last, the usefulness of the test is illustrated with several applications to latent variable models widely used in economics and finance.