This LM2 test statistic should be asymptotically distributed as N(0; 1) under H0c. The
corresponding standardized LM (SLM) test statistic is given by
LM2 — E(LM2)
SLm2 = --, —
var(LM2 )
d2 — E (d2)
√var(d2) ’
(2.17)
where d2 = —-— and D2 = (It W). Under H∩; SLM2 should be asymptotically distrib-
u~0 u~
uted as N(0; 1). SLM2 should have asymptotic critical values that are generally closer to the
corresponding exact critical values than those of the unstandardized LM2 test statistic.
2.4 One-Sided Joint LM Test for Ha: λ = ¾2, = 0
0
Following Honda (1985) for the two-way error component model, a handy one-sided test
statistic for Ha : λ = ¾X = 0 is given by
LM H = (LM1 + LM2)=p2; (2.18)
which is asymptotically distributed N(0; 1) under H0a.
Note that LMi in (2.12) can be negative for a specific application, especially when the true
ariance component ¾2x is small and close to zero. Similarly, LM2 in (2.16) can be negative
especially when the true A is small and close to zero. Following Gourieroux, Holly and
Monfort (1982), here after GHM, we propose the following test for the joint null hypothesis
Ha
H0:
LM12 + LM22 |
if LM1 |
> 0; |
LM2 |
>0 | |
2 |
>LM12 |
if LM1 |
> 0; |
LM2 |
•0 |
Â2m = | |||||
LM22 |
if LM1 |
• O; |
LM2 |
>0 | |
>:0 4 |
if LM1 |
• O; |
LM2 |
•0 |
(2.19)
Under the null hypothesis H0a , Â2m has a mixed Â2- distribution:
Âm » (4)Â2(0) + (2)Â2(1) + (4)Â2(2);
(2.20)
where â2(0) equals zero with probability one. The weights (4 ); (∣) and (4 ) follow from the
fact that LM1 and LM2 are asymptotically independent of each other and the results in
Gourieroux, Holly and Monfort (1982). The critical values for the mixed Â2m are 7:289, 4:321
and 2:952 for ® = 0:01, 0:05 and 0:1, respectively.
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