REVERSE SCORE AND LIKELIHOOD RATIO TESTS

DHAENE, G.*,  and SCAILLET, O. **

* GHENT UNIVERSITY ** IRES and IAG, UCL

 

Abstract

Two extensions of a parametric model are proposed, each one involving the score function of an alternative parametric model. We show that the encompassing hypothesis is equivalent to standard conditions on the score of each of the extended models. The condition on the first extension gives rise to the standard score encompassing test, while the condition on the second extension induces a so-called reversed score encompassing test. A similar logic is applied to the likelihood ratio, generating a likelihood ratio and a reversed likelihood ratio encompassing test. The ensued test statistics can be based on simulations if certain calculations are too difficult to carry out analytically. We study the first order asymptotic properties of the proposed test statistics under general conditions.

Keywords : score test, likelihood ratio test, encompassing, simulation-based inference.

JEL : C5, C3.