Econometric Theory and Methods

Answers to Starred Exercises

187

Solution to Exercise 15.21

15.21 Set up the OPG articial regression for the Cox test of model H1 against H2 in (15.37), assuming IID normal errors. In particular, show that, in the notation of Exercise 15.20, the typical element of the test regressor (15.54) takes the form log
2 2 1 + a 2 2

u 2 2t
2 2

2 1 + (MZ PX y )2 t 2+ 2 1 a

(15.91)

where u 2t is a typical element of the vector MZ y .

1 ) may be As we saw in the previous exercise, the terms that involve 1t ( omitted when calculating Cox tests for linear regression models. Therefore, from (15.54), a typical element of the test regressor must be
2t (2 )

E 1

2t (2 )

(S15.44)

The t th contribution to

2 (2 )

is
2 2

2t (2 )

1 1 1 2 = log 2 log 2

u 2 2t . 2 2 2

(S15.45)

We saw in the solution to the previous exercise that, under a DGP in H1 2 2 is equal, with an error of , the expectation of log 2 with parameters and 1 2 2 1 2 order n only, to log(1 + a ), where a is dened as plim n1 MZ X 2 . An entirely similar argument, based on a Taylor expansion, shows that the 2 2 is 1/a with error of order n1 only. expectation of 1/ 2 The residual u 2t is the t th element of the vector MZ y = MZ u + MZ X . 2 2 The expectation of u 2 2t is therefore 1 (1 ht ) + (MZ X )t , where ht is the th t diagonal element of PZ . A natural estimate of this expectation is
2 1 + (MZ PX y )2 t,

and thus a natural estimate of E(

2 2

2t (2 ))

is (S15.46)

1 1 1 2 2 log 2 log( 1 + a )

2 1 + (MZ PX y )2 t . 2+ 2 2 1 a

Subtracting expression (S15.46) from expression (S15.45) and multiplying the result by 2 (which we do for simplicity because the scale of the test regressor has no eect on the value of the test statistic) yields
2 log 2 2 u 2 1 + (MZ PX y )2 t 2t 2 2 + log( + ) + 1 a 2 2 2 2 1 + a 2 2 1 + a 2 2

= log

2 u 2 1 + (MZ PX y )2 t 2t + , 2 2+ 2 2 1 a

which is expression (15.91). Copyright c 2003, Russell Davidson and James G. MacKinnon