Tag Archives: ratio

Where does that 2 come from in the likelihood ratio test?

This afternoon, in class, we’ve seen Wald test, the likelihood-ratio test, and finally the score test. All of them rely on the same idea

and then, use that if   with , we can write

Or – slightly more interesting – if  , then

Then one can get that

Based on that property, we can derive Wald statistics,

that can be visualized below

The score test is a test on the square of the slope

The idea for the likelihood ratio test is to consider

Observe that  can be written, using Taylor’s expansion

for some . The first term is null, since the maximum likelihood estimator is precisely at the maximum of the (log) likelihood. So

That’s more or less where the 2 comes from. Then observe that

and therefore

This test will be discussed further next week (since it is related to Neyman-Pearson’s theorem), but also, that result can be used to derive confidence intervals. With a log-likelihood as follows

it is possible to get a confidence interval for the parameter by looking for‘s such that

We will discuss that idea later on, in the context of profile likelihood.

Tests on tail index for extremes

Since several students got the intuition that natural catastrophes might be non-insurable (underlying distributions with infinite mean), I will post some comments on testing procedures for extreme value models.

A natural idea is to use a likelihood ratio test (for composite hypotheses). Let http://freakonometrics.blog.free.fr/public/perso5/lrtest21.gif denote the parameter (of our parametric model, e.g. the tail index), and we would like to know whether http://freakonometrics.blog.free.fr/public/perso5/lrtest21.gif is smaller or larger than http://freakonometrics.blog.free.fr/public/perso5/lrtest22.gif (where in the context of finite versus infinite mean http://freakonometrics.blog.free.fr/public/perso5/lrtest23.gif). I.e. either http://freakonometrics.blog.free.fr/public/perso5/lrtest21.gif belongs to the set http://freakonometrics.blog.free.fr/public/perso5/lrtest-10.gif or to its complementary http://freakonometrics.blog.free.fr/public/perso5/lrtest-11.gif. Consider the maximum likelihood estimator http://freakonometrics.blog.free.fr/public/perso5/lrtest24.gif, i.e.


Let http://freakonometrics.blog.free.fr/public/perso5/lrtest25.gif and http://freakonometrics.blog.free.fr/public/perso5/lrtest-3.gif denote the constrained maximum likelihood estimators on http://freakonometrics.blog.free.fr/public/perso5/lrtest26.gif and http://freakonometrics.blog.free.fr/public/perso5/lrtest27.gif respectively,



Either http://freakonometrics.blog.free.fr/public/perso5/lrtest-13.gif and http://freakonometrics.blog.free.fr/public/perso5/lrtest-6.gif (on the left), or http://freakonometrics.blog.free.fr/public/perso5/lrtest-14.gif and http://freakonometrics.blog.free.fr/public/perso5/lrtest-7.gif (on the right)

So likelihood ratios

http://freakonometrics.blog.free.fr/public/perso5/lrtest-15.gif      http://freakonometrics.blog.free.fr/public/perso5/lrtest-16.gif

 are either equal to

http://freakonometrics.blog.free.fr/public/perso5/lrtest-19.gif      http://freakonometrics.blog.free.fr/public/perso5/lrtest-18.gif


http://freakonometrics.blog.free.fr/public/perso5/lrtest-20.gif        http://freakonometrics.blog.free.fr/public/perso5/lrtest-17.gif

If we use the code mentioned in the post on profile likelihood, it is easy to derive that ratio. The following graph is the evolution of that ratio, based on a GPD assumption, for different thresholds,

> base1=read.table(
+ "http://freakonometrics.free.fr/danish-univariate.txt",
+ header=TRUE)
> library(evir)
> X=base1$Loss.in.DKM
> U=seq(2,10,by=.2)
> LR=P=ES=SES=rep(NA,length(U))
> for(j in 1:length(U)){
+ u=U[j]
+ Y=X[X>u]-u
+ loglikelihood=function(xi,beta){
+ sum(log(dgpd(Y,xi,mu=0,beta))) }
+ XIV=(1:300)/100;L=rep(NA,300)
+ for(i in 1:300){
+ XI=XIV[i]
+ profilelikelihood=function(beta){
+ -loglikelihood(XI,beta) }
+ L[i]=-optim(par=1,fn=profilelikelihood)$value }
+ plot(XIV,L,type="l")
+ PL=function(XI){
+ profilelikelihood=function(beta){
+ -loglikelihood(XI,beta) }
+ return(optim(par=1,fn=profilelikelihood)$value)}
+ (L0=(OPT=optimize(f=PL,interval=c(0,10)))$objective)
+ profilelikelihood=function(beta){
+ -loglikelihood(1,beta) }
+ (L1=optim(par=1,fn=profilelikelihood)$value)
+ LR[j]=L1-L0
+ P[j]=1-pchisq(L1-L0,df=1)
+ G=gpd(X,u)
+ ES[j]=G$par.ests[1]
+ SES[j]=G$par.ses[1]
+ }
> plot(U,LR,type="b",ylim=range(c(0,LR)))
> abline(h=qchisq(.95,1),lty=2)

with on top the values of the ratio (the dotted line is the quantile of a chi-square distribution with one degree of freedom) and below the associated p-value

> plot(U,P,type="b",ylim=range(c(0,P)))
> abline(h=.05,lty=2)

In order to compare, it is also possible to look at confidence interval for the tail index of the GPD fit,

> plot(U,ES,type="b",ylim=c(0,1))
> lines(U,ES+1.96*SES,type="h",col="red")
> abline(h=1,lty=2)

To go further, see Falk (1995), Dietrich, de Haan & Hüsler (2002), Hüsler & Li (2006) with the following table, or Neves & Fraga Alves (2008). See also here or there (for the latex based version) for an old paper I wrote on that topic.