Assessing the Approximate Validity of Moment Restrictions

Pascal Lavergne

No 15-562, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: We propose a new theoretical framework to assess the approximate validity of overidentifying moment restrictions. Their validity is evaluated by the divergence between the true probability measure and the closest measure that imposes the moment restrictions of interest. The divergence can be chosen as any of the Cressie-Read family. The considered alternative hypothesis states that the divergence is smaller than some user-chosen tolerance. Tests are constructed based on the minimum empirical divergence that attain the local semiparametric power envelope of invariant tests. We show how the tolerance can be chosen by reformulating the hypothesis under test as a set of admissible misspecifications. Two empirical applications illustrate the practical usefulness of the new tests for providing evidence on the potential extent of misspecification.

Keywords: Hypothesis testing; Semiparametric models (search for similar items in EconPapers)
JEL-codes: C12 C14 C52 (search for similar items in EconPapers)
Date: 2015-03, Revised 2020-05
New Economics Papers: this item is included in nep-ecm
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:29157

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