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Interval-Based Hypothesis Testing and Its Applications to Economics and Finance

Jae Kim () and Andrew P. Robinson ()
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Andrew P. Robinson: School of Mathematics and Statistics, University of Melbourne, Parkville, VIC 3010, Australia

Econometrics, 2019, vol. 7, issue 2, 1-22

Abstract: This paper presents a brief review of interval-based hypothesis testing, widely used in bio-statistics, medical science, and psychology, namely, tests for minimum-effect, equivalence, and non-inferiority. We present the methods in the contexts of a one-sample t -test and a test for linear restrictions in a regression. We present applications in testing for market efficiency, validity of asset-pricing models, and persistence of economic time series. We argue that, from the point of view of economics and finance, interval-based hypothesis testing provides more sensible inferential outcomes than those based on point-null hypothesis. We propose that interval-based tests be routinely employed in empirical research in business, as an alternative to point null hypothesis testing, especially in the new era of big data.

Keywords: equivalence; minimum-effect; non-inferiority; point-null hypothesis testing; zero probability paradox (search for similar items in EconPapers)
JEL-codes: B23 C C00 C01 C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
Date: 2019
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