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Instrumental Models and Indirect Encompassing
Geert Dhaene
Christian Gourieroux
Oliver Scaillet
Abstract
We introduce nonnested hypotheses tests using indirect, simulation-based estimation procedures. We propose different test statistics and carefully examine the corresponding implicit null hypotheses. A notion of indirect encompassing comes up naturally, which may be compared to the usual encompassing conditions. Then we show how these methods extend standard specification and overidentification tests.
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