Sign up & Download
Sign in

The Lagrange Multiplier Test and Its Applications to Model Specification in Econometrics

by T. Breusch, A. Paga
The Review of Economic Studies ()

Abstract

Many econometric models are susceptible to analysis only by asymptotic techniques and there are three principles, based on asymptotic theory, for the construction of tests of parametric hypotheses. These are: (i) the Wald (W) test which relies on the asymptotic normality of parameter estimators, (ii) the maximum likelihood ratio (LR) procedure and (iii) the Lagrange multiplier (LM) method which tests the effect on the first order conditions for a maximum of the likelihood of imposing the hypothesis. In the econometric literature, most attention seems to have been centred on the first two principles. Familiar " t-tests " usually rely on the W principle for their validity while there have been a number of papers advocating and illustrating the use of the LR procedure. However, all three are equivalent in well-behaved problems in the sense that they give statistics with the same asymptotic distribution when the null hypothesis is true and have the same asymptotic power characteristics. Choice of any one principle must therefore be made by reference to other criteria such as small sample properties or computational convenience.

Cite this document (BETA)

Readership Statistics

116 Readers on Mendeley
by Discipline
 
 
 
by Academic Status
 
33% Ph.D. Student
 
16% Student (Master)
 
8% Doctoral Student
by Country
 
4% United States
 
3% France
 
3% United Kingdom

Sign up today - FREE

Mendeley saves you time finding and organizing research. Learn more

  • All your research in one place
  • Add and import papers easily
  • Access it anywhere, anytime

Start using Mendeley in seconds!

Already have an account? Sign in