Lecture Notes For STAT2602

Lecture Notes for STAT2602
Instructor: Dr. Ke Zhu

Email: mazhuke@hku.hk
Department of Statistics and Actuarial Science
The University of Hong Kong
Contents
1 Basic concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Random variable and probability function . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Discrete distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Continuous distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.4 Empirical distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1.5 Expectation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2 Preliminary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.1 Moment generating function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.2 Convergence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3 Point estimator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.1 Maximum likelihood estimator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.2 Method of moments estimator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
3.3 Estimator properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
3.3.1 Unbiasedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
3.3.2 Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
3.3.3 Consistency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
4 Interval Estimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
4.1 Basic concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
4.2 Confidence intervals for means . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
4.2.1 One-sample case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
4.2.2 Tow-sample case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
4.3 Confidence intervals for variances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
4.3.1 One-sample case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
4.3.2 Two-sample case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
5 Hypothesis testing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
5.1 Basic concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
5.2 Most powerful tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
v
vi Contents
5.3 Generalized likelihood ratio tests: One-sample case . . . . . . . . . . . . . . 72

5.3.1 Testing for the mean: Variance known . . . . . . . . . . . . . . . . . . . 73
5.3.2 Testing for the mean: Variance unknown . . . . . . . . . . . . . . . . . 76
5.3.3 Testing for the variance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
5.3.4 Test and interval estimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
5.4 Generalized likelihood ratio tests: Two-sample case . . . . . . . . . . . . . . 83
5.4.1 Testing for the mean: Variance is known . . . . . . . . . . . . . . . . . 83
5.4.2 Testing for the mean: Variance is unknown . . . . . . . . . . . . . . . 86
5.4.3 Testing for the variance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
5.5 Generalized likelihood ratio tests: Large samples . . . . . . . . . . . . . . . . 94
5.5.1 Goodness-of-fit tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
5.5.2 Pearson Chi-squared test of independence . . . . . . . . . . . . . . . . 100
Chapter 1
Basic concepts
Abstract A random variable usually results from a random experiment, and its ful-
l information is determined by its cumulative distribution function or probability
density function, which however is unknown in practice. By repeating the random
experiment several times (say, n times), we obtain a random sample which consists
of the results of all repeated random experiments. Based on this random sample,
we are able to estimate the cumulative distribution function (by the empirical distri-
bution) and the probability density function (by the relative frequency histogram).
This chapter reviews these basic concepts in statistics. If you are familiar with these
concepts, you can skip this chapter.
1.1 Random variable and probability function
A random variable
X : E
X( )
is a measurable function from the set of possible outcomes to some realization

set E. Here, is called the sample space, and E is called the state space, which is
measurable. Any element in the sigma-algebra of (denoted by ( )) is called an
event, and generally speaking, an event A is a subset of . The value of X is subject
to variations due to chance, which can be measured by a probability function P on
A.
Definition 1.1. (Probability function) The probability function P is a set function

that assigns to each event A a number P(A), called the probability of the event A,
such that the following properties are satisfied:
(1) P(A) 0;
(2) P( ) = 1;
1
2 1 Basic concepts
(3) If A1 , A2 , are events and Ai A j = 0/ for i = j, then
P(A1 A2 ) = P(A1 ) + P(A2 ) + .
If E contains only a finite number of points, X is called a discrete random vari-

able. If E contains intervals or a union of intervals, X is called a continuous random
variable. From now on, we assume that E is a subset of R s , where R = [, ] and
the integer s 1.
Example 1.1. (Toss a coin once)

1. The result of a single toss is a discrete random variable X;
2. = {Head (H), Tail (T)} and E = {0, 1} such that X(H) = 0 and X(T) = 1;
3. ( ) = {0,
/ H, T, };
4. P(H) = P(X = 0) = 1/2 and P(T ) = P(X = 1) = 1/2 (i.e., the probability func-
tion assigns a probability 1/2 to each point of ).
Example 1.2. (Toss a coin twice)

1. The result of two tosses is a discrete random variable X = (X1 , X2 );
2. = {HH, HT, TH, TT} and E = {(0, 0), (0, 1), (1, 0), (1, 1)} such that X(HH) =
(0, 0), X(HT) = (0, 1), X(TH) = (1, 0), and X(TT) = (1, 1);
3. ( ) = All subsets of (Please write down by yourself);
4. P(HH) = P(X = (0, 0)) = 1/4, P(HT ) = P(X = (0, 1)) = 1/4, P(TH) = P(X =
(1, 0)) = 1/4, and P(T T ) = P(X = (1, 1)) = 1/4 (i.e., the probability function
assigns a probability 1/4 to each point of ).
Example 1.3. (Stock price)

1. The price of one stock is a continuous random variable X;
2. = E = (0, ) such that X( ) = for any ;
3. ( ) = ((0, x]; x > 0);
4. P(X (0, x]) = W (x) (i.e., the probability function assigns a probability W (x) to
the event (0, x] in ( )).
1.2 Discrete distribution
Let x be a realization of a discrete random variable X R. Then,
f (x) = P(X = x)
is the probability density function (p.d.f.) of X. Clearly, f (x) tells us how likely the
event { : X( ) = x} happens.
Theorem 1.1. (Discrete univariate probability density function) A discrete univari-

ate probability density function has the following properties:
1.2 Discrete distribution 3
(1) f (x) > 0 for x E;

(2) xE f (x) = 1;
(3) P(X A) = xA f (x), where A E.
Remark 1.1. The proof of Theorem 1.1 follows directly from Definition 1.1, and the
details are omitted.
Remark 1.2. Any function f (x) satisfies (1)-(3) of Theorem 1.1 can induce a random
variable, which has a p.d.f. f (x).
Let f (x) = 0 for x E. Then, the domain of f (x) can be extended to R, and
supp( f ) = E. Here, supp( f ) = {x : f (x) = 0} is the support of f (x), i.e., supp( f ) is
the subset of the domain containing those elements which are not mapped to zero.
The graph of the p.d.f. of a discrete random variable X would be a plot of the points
{(x, f (x)) : x E}. However, it is easier to visualize the corresponding probabilities
if a vertical line segment is drawn from each (x, f (x)) to (x, 0), to form a bar graph
(see Fig.1.1 for an illustration).
3/6
2/6
f(x)
1/6
0
1 2 3
x
1
F (x)
1/2
1/6
1 2 3
x
Fig. 1.1 The top panel is the p.d.f F(x) of a discrete random variable X, where f (x) = P(X = x) =
x/6 for x = 1, 2, 3, and the bottom panel is the corresponding c.d.f. F(x).
4 1 Basic concepts
Based on the p.d.f. f (x), we define the function F(x) by
F(x) = P(X x) = f (e).

eE and ex
The function F(x) is called the cumulative distribution function (c.d.f.) of the dis-
crete random variable X. Note that F(x) is a step function on R and the height of a
step at x, x E, equals the probability f (x) (see Fig.1.1 for an illustration).
From Theorem 1.1, we can obtain the following theorem.
Theorem 1.2. (Discrete cumulative distribution function) A discrete univariate cu-

mulative distribution function has the following properties:
(1) 0 F(x) 1 for x R;
(2) F(x) is a nondecreasing function of x;
(3) F() = 1 and F() = 0.
Remark 1.3. The p.d.f. f (x) and the c.d.f. F(x) are one-to-one corresponding. We
can first define the c.d.f. F(x), and then define the p.d.f. f (x) by
f (x) = F(x) F(x) for x E.
Example 1.4. Let the random variable X of the discrete type have the p.d.f. f (x) =
x/6, x = 1, 2, 3. Then,

0 for x < 1
1
for 1 x < 2
F(x) = 61

for 2 x < 3
2
1 for x 3.
What is the c.d.f. of 2X + 1?
Example 1.5. Let X be a discrete random variable taking value at 1, 2, and 3. Sup-
pose that F(x) is the c.d.f. of X, and it satisfies that

F(1) = 12
F(2) = c

F(3) = c2 56 c + 76 .
Then, what is the value of c?
The above definitions of p.d.f and c.d.f. can be similarly extended for the discrete
multivariate random variable X = (X1 , , Xs ) R s for s > 1. Let x = (x1 , , xs )
E R s be a realization of X. Then, the p.d.f. of X is
f (x1 , , xs ) = P(X1 = x1 , , Xs = xs ).
Usually, f (x1 , , xs ) is called the joint p.d.f. of random variables X1 , X2 , , Xs .

Theorem 1.3. (Discrete multivariate probability density function) A discrete multi-

variate probability density function has the following properties:
(1) f (x1 , , xs ) > 0 for (x1 , , xs ) E;
(2) (x1 , ,xs )E f (x1 , , xs ) = 1;
(3) P((X1 , , Xs ) A) = (x1 , ,xs )A f (x1 , , xs ), where A E.
Let f (x1 , , xs ) = 0 for (x1 , , xs ) E. Then, the domain of f (x1 , , xs ) can
be extended to R s , and supp( f ) = E. From the joint p.d.f. f (x1 , , xs ), we can
obtain the p.d.f of a single Xk :
fk (xk ) = f (x1 , , xs ).
x1 xk1 xk+1 xs
We call fk (xk ) the marginal p.d.f. of Xk . This marginal p.d.f. fk (xk ) is calculated
by summing f (x1 , , xs ) over all xi s except xk . Further, we say that X1 , , Xs are
independent if and only if
f (x1 , x2 , , xs ) = f1 (x1 ) f2 (x2 ) fs (xs ) for (x1 , x2 , , xs ) E.
Otherwise, we say that X1 , , Xs are dependent.

A joint marginal p.d.f. of X j and Xk is calculated similarly by summing f (x1 , , xs )
over all xi s except x j and xk ; that is,
f j,k (x j , xk ) = f (x1 , , xs ).
x1 x j1 x j+1 xk1 xk+1 xs
Extensions of these marginal p.d.f.s to more than two random variables are made in
an obvious way.
Based on the p.d.f. f (x1 , , xs ), the c.d.f. of X = (X1 , , Xs ) R s is defined
by
F(x1 , , xs ) = f (e1 , , es ).
(e1 , ,es )E and e1 x1 , ,es xs
Theorem 1.4. (Discrete multivariate cumulative distribution function) A discrete

multivariate cumulative distribution function has the following properties:
(1) 0 F(x1 , , xs ) 1 for (x1 , , xs ) R s ;
(2) F(x1 , , xs ) is a nondecreasing function of each xi ;
(3) F(, , ) = 1 and F(, , ) = 0.
Property 1.1. Two discrete random variables X and Y are independent if and only if
F(x, y) = FX (x)FY (y) for all (x, y) E.
Proof. We only give the proof of the if part. Note that
f (e1 , e2 ) = f (e1 , e2 ) + f (e1 , e2 )

e1 x,e2 y e1 x,e2 <y e1 <x,e2 y
+ f (e1 , e2 ) f (e1 , e2 ).
e1 =x,e2 =y e1 <x,e2 <y
6 1 Basic concepts
Hence,
f (x, y) = F(x, y) F(x, y) F(x, y) + F(x, y)

= FX (x)FY (y) FX (x)FY (y) FX (x)FY (y) + FX (x)FY (y)
= [FX (x) FX (x)] [FY (y) FY (y)]
= fX (x) fY (y),
which entails that X and Y are independent.

Property 1.2. Let X and Y be two independent discrete random variables. Then,
(a) for arbitrary countable sets A and B,
P(X A,Y B) = P(X A)P(Y B);
(b) for any real functions g() and h(), g(X) and h(Y ) are independent.
Proof. (a) Note that
P(X A,Y B) = P(X = x,Y = y) (by Theorem 1.3(3))

xA yB
= P(X = x)P(Y = y) (by independence)

xA yB
= P(X = x) P(Y = y)
xA yB
= P(X A)P(Y B) (by Theorem 1.3(3))
as required.
(b) For any and , let A = {x : g(x) = } and B = {y : h(y) = }, and then the
joint p.d.f. of g(X) and h(Y ) is
P(g(X) = , h(Y ) = ) = P(X A,Y B)

= P(X A)P(Y B) (by (a))
= P(g(X) = )P(h(Y ) = ).
It follows that g(X) and h(Y ) are independent. This completes the proof.

Example 1.6. Let the joint p.d.f. of X and Y be
xy2
f (x, y) = , x = 1, 2, 3, y = 1, 2.
30
The marginal p.d.f of X is
xy2 x
f1 (x) = 30
= ,
6
x = 1, 2, 3.
y=1,2
The marginal p.d.f. of Y is

xy2 y2
f2 (y) = = , y = 1, 2.
x=1,2,3 30 5
Since f (x, y) = f1 (x) f2 (y) for x = 1, 2, 3 and y = 1, 2, X and Y are independent.

Example 1.7. Let X and Y be two independent geometric random variables having
respective p.d.f. fX (x) = (1 ) x and fY (y) = (1 ) y for x 0 and y 0. What
is the p.d.f of Z = min(X,Y )?
Solution. Note that for z 1,
P(Z > z) = P(X > z,Y > z)

= P(X > z)P(Y > z) (by Property 1.2(a))
= fX (x) fY (y) = z+1 z+1 .
x>z y>z
Hence, for any z 0,
P(Z = z) = P(Z > z 1) P(Z > z) = (1 )( )z .
That is, Z is also a geometric random variable with parameter .

We introduce an important discrete distribution, called the multinomial distribu-
tion. Consider a sequence of repetitions of an experiment for which the following
conditions are satisfied:
1. The experiment has k possible outcomes that are mutually exclusive and exhaus-
tive, say A1 , A2 , , Ak .
2. n independent trials of this experiment are observed.
3. P(Ai ) = pi , i = 1, 2, , k, one each trial with ki=1 pi = 1.
Note that a simple example of multinomial distribution is the coin toss repetitive-
ly for n times. In this case, there are two outcomes A1 and A2 in each independent
trial, where A1 = {Head} (i.e., the result of the trial is Head), A2 = {Tail} (i.e., the
result of the trial is Tail), P(A1 ) = p, and P(A2 ) = 1 p (e.g., typically p = 1/2 so
that there is an equal probability to get Head and Tail). Let the random variable X
be the number of times A1 occurs in the n trials. Then,
( )
n x
f (x) = P(X = x) = p (1 p)nx , x = 0, 1, 2, , n.
x
The above distribution, denoted by B(n, p), is called the binomial distribution. Par-
ticularly, B(1, p) is called Bernoulli distribution.
The multinomial distribution is a natural extension of the binomial distribution.
Let the random variable Xi be the number of times Ai occurs in the n trials, i =
1, 2, , k. Then, the multinomial distribution of X1 , , Xk is defined by
( )
n x
f (x1 , , xk ) = P(X1 = x1 , , Xk = xk ) = px1 px2 pkk ,
x1 , x2 , , xk 1 2
8 1 Basic concepts
x1 , , xk are nonnegative integers such that x1 + + xk = n.
Example 1.8. A bowl contains three red, four white, two blue, and five green balls.
One ball is drawn at random from the bowl and the replaced. This is repeated 20
independent times. Let X1 , X2 , X3 , and X4 denote the numbers of red, white, blue,
and green balls drawn, respectively. What is the joint p.d.f. of X1 , X2 , X3 , and X4 ?
Solution. For each draw, there are four outcomes (say, red, white, blue, and green)
for the color of the ball, and it is easy to see that
3
p1 = P(the drawn ball is red) = ,
14
4
p2 = P(the drawn ball is white) = ,
14
2
p3 = P(the drawn ball is blue) = ,
14
5
p4 = P(the drawn ball is green) = .
14
Thus, the joint p.d.f. of X1 , X2 , X3 , and X4 is
f (x1 , x2 , x3 , x4 ) = P(X1 = x1 , X2 = x2 , X3 = x3 , X4 = x4 )
( ) ( )x1 ( )x2 ( )x3 ( )x4
20 3 4 2 5
= ,
x1 , x2 , x3 , x4 14 14 14 14
for x1 + x2 + x3 + x4 = 20.

1.3 Continuous distribution
Let X R be a continuous random variable. The probability of X lies in an interval

(a, b] is
b
P(a < X b) = f (x)dx
a
for some non-negative function f (). That is, the probability P(a < X b) is the
area bounded by the graph of f (x), the x axis, and the lines x = a and x = b. We call
f (x) the p.d.f. of the continuous random variable X.
Theorem 1.5. (Continuous univariate probability density function) A continuous u-

nivariate probability density function has the following properties:
(1) f (x) 0 for x R;
(2) R f (x)dx =1;
(3) P(X A) = A f (x)dx for A R.
Based on the p.d.f. f (x), the c.d.f of X is defined as

1.3 Continuous distribution 9
x
F(x) = P(X x) = f (e)de,

which also satisfies Theorem 1.2. From the fundamental theorems of calculus, we
have F (x) = f (x) if exists. Since there are no steps or jumps in a continuous c.d.f.,
it must be true that P(X = b) = 0 for all real values of b.
As you can see, the definition for the p.d.f. (or c.d.f.) of a continuous random
variable differs from the definition for the p.d.f. (or c.d.f.) of a discrete random
variable by simply changing the summations that appeared in the discrete case to
integrals in the continuous case.
Example 1.9. (Uniform distribution) A random variable X has a uniform distribution

if
{ 1
, for a x b,
f (x) = ba
0, otherwise.
Briefly, we say that X U(a, b).
Property 1.3. If F is a continuous c.d.f. and X U(0, 1), then Y = F 1 (X) F.
Proof.
P(Y x) = P(F 1 (X) x) = P(X F(x)) = F(x).
Note that this property helps us to generate a random variable from certain distribu-
tion.
Example 1.10. (Normal distribution) A random variable X has a normal distribution

if
[ ]
1 (x )2
f (x) = exp for x R,
2 2 2
where R is the location parameter and > 0 is the scale parameter. Briefly, we
say that X N( , 2 ). A simple illustration of f (x) with different values of and
is given in Fig.1.2.
Further, Z = (X )/ N(0, 1) (the standard normal distribution), and the
c.d.f. of Z is typically denoted by (x), where
x [ ]
1 w2
(x) = P(Z x) = exp dw.
2 2
Numerical approximations for (x) have been well tabulated in practice.
Property 1.4. If the p.d.f. of a continuous random variable X is fX (x) for x R, the
a ) for x R.
p.d.f. of Y = aX + b for a = 0 is fY (x) = 1a fX ( xb
Proof. Let FX (x) be the c.d.f. of X. Then, the c.d.f. of Y is

10 1 Basic concepts
0.4 0.4
N (0, 1) N (2, 1)
0.35 N (0, 4) 0.35 N (2, 4)
0.3 0.3
0.25 0.25
f(x)
f(x)
0.2 0.2
0.15 0.15
0.1 0.1
0.05 0.05
0 0
-10 -5 0 5 10 -5 2 10
x x
Fig. 1.2 The p.d.f f (x) of N( , 2 ).
( ) ( )
xb xb
FY (x) = P(Y x) = P(aX + b x) = P X = FX
a a
for x R. Hence,
( ) ( )
1 xb 1 xb
fY (x) = FY (x) = F = fX .
a X a a a
This completes the proof.

The definitions of p.d.f. and c.d.f. for the continuous univariate random vari-
able can be similarly extended for the continuous multivariate random variable
X = (X1 , , Xs ) R s , s > 1. The probability of X lies in a rectangle A =
(a1 , b1 ] (a2 , b2 ] (as , bs ] is
b1 b2 bs
P(X A) = f (x1 , x2 , , xs )dx1 dx2 dxs
a1 a2 as
for some non-negative function f (x1 , x2 , , xs ). For instance, when s = 2, the prob-
ability P(X A) is the volume of the solid over the region A in the x1 x2 plane and
bounded by the surface z = f (x1 , x2 ). We call f (x1 , x2 , , xs ) the joint p.d.f. of the
continuous random variables X1 , , Xs .
Theorem 1.6. (Continuous multivariate probability density function) A continuous

multivariate probability density function has the following properties:
(1) f (x1, x2 , , xs ) 0 for (x1 , x2 , , xs ) R s ;

(2) f (x1 , x2, , xs )dx1 dx2 dxs = 1;
(3) P((X1 , , Xs ) A) = A f (x1 , x2 , , xs )dx1 dx2 dxs for A R s .
1.3 Continuous distribution 11
Similar to the discrete case, the marginal p.d.f. of any single Xk is given by the
(s 1)-fold integral:

fk (xk ) = f (x1 , x2 , , xs )dx1 dxk1 dxk+1 dxs

for xk R; and we say X1 , , Xs are independent if and only if
f (x1 , , xs ) = f1 (x1 ) fs (xs )
for (x1 , , xs ) R s .
Based on the p.d.f. f (x1 , , xs ), the c.d.f. of a continuous multivariate random
variable X = (X1 , , Xs ) is
x1 xs
F(x1 , , xs ) = P(X1 x1 , , Xs xs ) = f (e1 , , es )de1 des ,

which also satisfies Theorem 1.4. It is worth noting that
s F(x1 , , xs )
f (x1 , , xs ) = ,
x1 xs
if exists.
Property 1.5. Two continuous random variables X and Y are independent if and only
if
F(x, y) = FX (x)FY (y) for all (x, y) R2 .
Proof. The proof of the only if part is obvious, and the proof of the if part
follows by the fact that
2 F(x, y) 2 FX (x)FY (y) FX (x) FY (y)

f (x, y) = = = = fX (x) fY (y).
x y x y x y
This completes the proof.

Property 1.6. Let X and Y be two independent continuous random variables. Then,
(a) for arbitrary intervals A and B,
P(X A,Y B) = P(X A)P(Y B);
(b) for any real functions g() and h(), g(X) and h(Y ) are independent.
Proof. (a) Note that

P(X A,Y B) = f (x, y)dxdy (by Theorem 1.6(3))
xA yB

= fX (x) fY (y)dxdy (by independence)
xA yB
12 1 Basic concepts

= fX (x)dx fY (y)dy
xA yB
= P(X A)P(Y B) (by Theorem 1.6(3))
(b) For any and , let A = {x : g(x) } and B = {y : h(y) }, and then the
joint c.d.f. of g(X) and h(Y ) is
P(g(X) , h(Y ) ) = P(X A,Y B)

= P(X A)P(Y B) (by (a))
= P(g(X) )P(h(Y ) ).
It follows that g(X) and h(Y ) are independent by Property 1.5. This completes the
proof.
Example 1.11. Let X and Y have the joint p.d.f.
f (x, y) = 2, 0 x y 1.
Then, E = {(x, y) : 0 x y 1} is the support, and
P(0 X 1/2, 0 Y 1/2) = P(0 X Y, 0 Y 1/2)

1/2 y 1/2
= 2dxdy = 2ydy = 1/4.
0 0 0
The above probability can also be calculated by
P(0 X 1/2, 0 Y 1/2) = P(0 X 1/2, X Y 1/2)

1/2 x 1/2
= 2dydx = 2(1/2 x)dx = 1/4.
0 1/2 0
The marginal distribution of X is

1
f1 (x) = 2dy = 2(1 x), 0 x 1,
x
and the marginal distribution of Y is

y
f2 (y) = 2dx = 2y, 0 y 1.
0
Example 1.12. The random variables X and Y have joint density

{ a
cx , if 0 < x < 1, y < 1, x + y > 1, a > 1,
f (x, y) =
0, otherwise.
(a) What is c? (b) What is F(x, y)?

Solution. (a) Since f (x, y)dxdy = 1, this entails
1.4 Empirical distribution 13
1 1
c1 = xa dydx = (a + 2)1 .
0 1x
(b) By definition,
x y
a + 2 a+1 a + 2 a+1 1
F(x, y) = cua dvdu = yx + xa+2 x + (1 y)a+2 .
1y 1u a+1 a+1 a+1

1.4 Empirical distribution
Suppose that X F(x) is a random variable resulting from a random experiment.

Repeat this experiment n independent times, we get n random variables X1 , , Xn
associated with these outcomes. The collection of these random variables is called
a sample from a distribution with c.d.f. F(x) (or p.d.f. f (x)). The number n is called
the sample size.
As all random variables in a sample follow the same c.d.f. as X, we expect that
they can give us the information about the c.d.f of X. Next, we are going to show
that the empirical distribution of {X1 , , Xn } is close to F(x) in some probability
sense.
The empirical distribution of {X1 , , Xn } is defined as
1 n
Fn (x) = I(Xk x)
n k=1
for x R, where I(A) is an indicator function such that I(A) = 1 if A holds and
I(A) = 0 otherwise. Obviously, Fn (x) assigns the probability 1/n to each Xk , and
we can check that it satisfies Theorem 1.2 (please do it by yourself). Since Fn (x) is
the relative frequency of the event X x, it is an approximation of the probability
P(X x) = F(x). Thus, the following result is expected.
Theorem 1.7. (Glivenko-Cantelli theorem) As n , supxR |Fn (x) F(x)| 0

almost surely (a.s.); furthermore, for each x R,

n(Fn (x) F(x)) d N(0, F(x)(1 F(x))),
and this convergence can be further extended by the Donskers theorem, where d
stands for the convergence in distribution.
The proof of aforementioned theorem is omitted. This theorem shows that the
empirical distribution function Fn (x) provides an estimate of the c.d.f. F(x). To see
it more clearly, Fig.1.3 plots the empirical distribution function Fn (x) based on a
data sample {X1 , , Xn } with Xi N(0, 1). As a comparison, the c.d.f. (x) of
N(0, 1) is also included in Fig.1.3. From this figure, we can see that Fn (x) is getting
14 1 Basic concepts
close to (x) as the sample size n increases, and this is consistent to the conclusion
in Theorem 1.7.
0.8 (a) n=10 (b) n=50
0.8
Fn(x)
Fn(x)
0.4
0.4
0.0
0.0
1 0 1 2 2 1 0 1 2 3
x x
(c) n=100 (d) n=500

0.8
0.8
Fn(x)
Fn(x)
0.4
0.4
0.0
0.0
2 1 0 1 2 3 3 1 0 1 2 3
x x
Fig. 1.3 The black step function is the empirical distribution function Fn (x) based on a data sample
{X1 , , Xn } with Xi N(0, 1). The red solid line is the c.d.f. (x) of N(0, 1).
Example 1.13. Let X denote the number of observed heads when four coins are
tosses independently and at random. Recall that the distribution of X is B(4, 1/2).
One thousand repetitions of this experiment (actually simulated on the computer)
yielded the following results:
Number of heads Frequency

0 65
1 246
2 358
3 272
4 59
1.4 Empirical distribution 15
This information determines the following empirical distribution function:
x F1000 (x) x F1000 (x)

(, 0) 0.000 [2, 3) 0.669
[0, 1) 0.065 [3, 4) 0.941
[1, 2) 0.311 [4, ) 1.000
The graph of the empirical distribution function F1000 (x) and the theoretical distri-
bution function F(x) for the binomial distribution are very close (please check it by
yourself).
Example 1.14. The following numbers are a random sample of size 10 from some
distribution:
0.49, 0.90, 0.76, 0.97, 0.73, 0.93, 0.88, 0.75, 0.88, 0.96.
(a) Write done the empirical distribution; (b) use the empirical distribution to esti-
mate P(X 0.5) and P(0.5 X 0.5).
Solution. Order the random sample:
0.97, 0.88, 0.75, 0.73, 0.49, 0.76, 0.88, 0.90, 0.93, 0.96.
Then, the empirical distribution function F10 (x) is as follows:
x F10 (x) x F10 (x)

(, 0.97) 0.0 [0.49, 0.76) 0.5
[0.97, 0.88) 0.1 [0.76, 0.88) 0.6
[0.88, 0.75) 0.2 [0.88, 0.90) 0.7
[0.75, 0.73) 0.3 [0.90, 0.93) 0.8
[0.73, 0.49) 0.4 [0.93, 0.96) 0.9
[0.96, ) 1.0
Thus, P(X 0.5) = F(0.5) F10 (0.5) = 0.5 and P(0.5 X 0.5) =
F(0.5) F(0.5) F10 (0.5) F10 (0.5) = 0.5 0.4 = 0.1.

The question now is how to estimate the p.d.f. f (x)? The answer is relative
frequency histogram.
For the discrete random variable X, we can estimate f (x) = P(X = x) by the
relative frequency of occurrences of x. That is,
nk=1 I(Xk = x)
f (x) fn (x) = .
n
Example 1.13. (cont) The relative frequency of observing x = 0, 1, 2, 3 or 4 is listed
in the second column, and it is close to the value of f (x), which is the p.d.f of
B(4, 1/2).
16 1 Basic concepts
x f1000 (x) f (x)

0 0.065 0.0625
1 0.246 0.2500
2 0.358 0.3750
3 0.272 0.2500
4 0.059 0.0625
By increasing the value of n, the difference between fn (x) and f (x) will become
small.
For the continuous random variable X, we first define the so-called class intervals.
Choose an integer l 1, and a sequence of real numbers c0 , c1 , , cl such that
c0 < c1 < < cl . The class intervals are
(c0 , c1 ], (c1 , c2 ], , (cl1 , cl ].
Roughly speaking, the class intervals are a non-overlapped partition of the interval
[Xmin , Xmax ]. As f (x) = F (x), we expect that when c j1 and c j is close,
F(c j ) F(c j1 )
f (x) for x (c j1 , c j ], j = 1, 2, , l.
c j c j1
Note that
nk=1 I(Xk (c j1 , c j ])
F(c j ) F(c j1 ) = P(X (c j1 , c j ])
n
is the relative frequency of occurrences of Xk (c j1 , c j ]. Thus, we can approximate
f (x) by
nk=1 I(Xk (c j1 , c j ])
f (x) hn (x) = for x (c j1 , c j ], j = 1, 2, , l.
n(c j c j1 )
We call hn (x) the relative frequency histogram. Clearly, the way that we define the
class intervals is not unique, and hence the value of hn (x) is not unique. When the
sample size n is large and the length of the class interval is small, hn (x) is expected
to be a good estimate of f (x).
The property of hn (x) is as follows:
(i) hn (x) 0 for all x;
(ii) The total area bounded by the x axis and below hn (x) equals one, i.e.,
cl
hn (x)dx = 1;
c0
(iii) The probability for an event A, which is composed of a union of class intervals,
can be estimated by the area above A bounded by hn (x), i.e.,

P(A) hn (x)dx.
A
1.5 Expectation 17
Example 1.15. A random sample of 50 college-bound high school seniors yielded

the following high school cumulative grade point averages (GPAs).
3.77 2.78 3.40 2.20 3.26
3.00 2.85 2.65 3.08 2.92
3.69 2.83 2.75 3.97 2.74
2.90 3.38 2.38 2.71 3.31
3.92 3.29 4.00 3.50 2.80
3.57 2.84 3.18 3.66 2.86
2.81 3.10 2.84 2.89 2.59
2.95 2.77 3.90 2.82 3.89
2.83 2.28 3.20 2.47 3.00
3.78 3.48 3.52 3.20 3.30
(a) Construct a frequency table for these 50 GPAs using 10 intervals of equal length
with c0 = 2.005 and c10 = 4.005.
(b) Construct a relative frequency histogram for the grouped data.
(c) Estimate f (3) and f (4).
Solution. (a) and (b). The frequency and the relative frequency histogram based on
the class intervals are given in the following table:
class interval frequency relative frequency class interval frequency relative frequency
histogram histogram
(2.005, 2.205] 1 0.1 (3.005, 3.205] 5 0.5
(2.205, 2.405] 2 0.2 (3.205, 3.405] 6 0.6
(2.405, 2.605] 2 0.2 (3.405, 3.605] 4 0.4
(2.605, 2.805] 7 0.7 (3.605, 3.805] 4 0.4
(2.805, 3.005] 14 1.4 (3.805, 4.005] 5 0.5
(c) As 3 (2.805, 3.005] and 4 (3.805, 4.005],
14
f (3) h50 (3) = = 1.4,
50 (3.005 2.805)
5
f (4) h50 (4) = = 0.5.
50 (4.005 3.805)

1.5 Expectation
Definition 1.2. (Expectation of a discrete statistic) If u(X1 , , Xn ) is a function of

n discrete random variables that have a joint p.d.f. f (x1 , , xn ), then
18 1 Basic concepts
E[u(X1 , , Xn )] = u(x1 , , xn ) f (x1 , , xn ),

(x1 , ,xn )E
where the summation is taken over all possible pairs of (x1 , , xn ). If E[u(X1 , , Xn )]
exists, it is called the mathematical expectation (or expected value) of u(X1 , , Xn ).
Remark 1.4. E[u(X1 , , Xn )] exists if
|u(x1 , , xn )| f (x1 , , xn ) < .

(x1 , ,xn )E
Let fi (xi ) be the p.d.f. of Xi for i = 1, 2, , n.

(i) i := E(Xi ) = xi xi fi (xi ), where the summation is taken over all possible values
of Xi . We call i the mean of Xi .
(ii) i2 := Var(Xi ) = E((Xi i )2 ) = xi (xi i )2 fi (xi ), where the summation is
taken over all possible values of Xi . We call i2 the variance of Xi , and i the standard
deviation of Xi .
(iii) i j := Cov(Xi , X j ) = E((Xi i )(X j j )) = (xi ,x j ) (xi i )(x j j ) fi, j (xi , x j ),
where the summation is taken over all possible values of (Xi , X j ). We call i j the co-
variance of Xi and X j .
(iv) If i > 0 and j > 0, then
Cov(Xi , X j ) i j
(Xi , X j ) = =
Var(Xi )Var(X j ) i j
is called the correlation coefficient of Xi and X j .

Simple algebra shows that
Cov(Xi , X j ) = E(Xi X j ) i j .
If Cov(Xi , X j ) = 0, we say that Xi and X j are uncorrelated.

Example 1.16. Let X and Y have the joint p.d.f.
x1 + 2x2
f (x1 , x2 ) = , x1 = 1, 2, x2 = 1, 2,
18
The marginal p.d.f of X1 is
x1 + 2x2 2x1 + 6
f1 (x1 ) = 18
=
18
, x1 = 1, 2;
x2 =1,2
and the marginal p.d.f. of X2 is

x1 + 2x2 3 + 4x2
f2 (x2 ) = 18
=
18
, x2 = 1, 2.
x1 =1,2
The mean and the variance of X1 are

1.5 Expectation 19
8 10 14
1 = x1 f1 (x1 ) =
18
+2
18
=
9
x1 =1,2
and
14 2 8 14 10 20
12 = (x1 1 )2 f1 (x1 ) = (1 )
9 18
+ (2 )2 = ;
9 18 81
x1 =1,2
and the mean and the variance of X2 are

7 11 29
2 = x2 f2 (x2 ) =
18
+2 =
18 18
x2 =1,2
and
29 2 7 29 11 77
22 = (x2 2 )2 f2 (x2 ) = (1 )
18 18
+ (2 )2 =
18 18 324
.
x2 =1,2
The covariance of X1 and X2 is

x1 + 2x2 1
Cov(X1 , X2 ) = E(X1 X2 ) 1 2 = x1 x2
18
1 2 =
162
.
x1 =1,2 x2 =1,2
The correlation coefficient of X1 and X2 is
Cov(X1 , X2 ) 1/162 1
(X1 , X2 ) = = = = 0.025.
1 2 (20/81) (29/18) 1540
Property 1.7. Let X be a discrete random variable with finite mean E(X), and let a
and b be constants. Then,
(i) E(aX + b) = aE(X) + b;
(ii) if P(X = b) = 1, then E(X) = b;
(iii) if P(a < X b) = 1, then a < E(X) b;
(iv) if g(X) and h(X) have finite mean, then
E(g(X) + h(X)) = E(g(X)) + E(h(X)).
Proof. (i) By the definition of expectation,
E(aX + b) = (ax + b) f (x) = a x f (x) + b = aE(X) + b < .

x x
(ii) As X has mass function f (b) = 1, E(X) = b f (b) = b.

(iii) In this case f (x) = 0 for x (a, b], so
{
x b f (x) = b,
E(X) = x f (x) = x f (x) =
x
> x a f (x) = a.
x(a,b]
20 1 Basic concepts
(iv) By the definition of expectation,
E(g(X) + h(X)) = (g(x) + h(x)) f (x)

x
= g(x) f (x) + h(x) f (x)
x x
= E(g(X)) + E(h(X)) <
as E(g(X)) < and E(h(X)) < .

Property 1.8. If X 0 takes integer values, then E(X) =

x=1 P(X x) = x=0 P(X >
x).
Proof. By definition,
x
E(X) = x f (x) = f (x) 1 = f (x) I(r x) = f (x)I(r x).
x=1 x=1 r=1 x=1 r=1 x=1 r=1
Interchanging the order of summation, we obtain that

E(X) = f (x)I(r x) = f (x) = P(X r).
r=1 x=1 r=1 x=r r=1
Hence, the conclusion holds by noting that

P(X r) = P(X > r 1) = P(X > r).
r=1 r=1 r=0
Example 1.17. A coin shows a head with probability p. Then, how many times do
you expect to toss the coin until it first shows a head?
Solution. Let the required number of tosses until the first head be T . Then, as each
toss is independent, P(T = x) = qx1 p for x 1, where q = 1 p. Hence,

1
E(T ) = xqx1 p = p .
x=1
Another simple way to calculate E(T ) is by noting that P(T > x) = qx for x 0 and

1
E(T ) = P(T > x) = qx = p .
x=0 x=0
Definition 1.3. (Expectation of a continuous statistic) If u(X1 , , Xn ) is a function

of n continuous random variables that have a joint p.d.f. f (x1 , , xn ), then
1.5 Expectation 21

E[u(X1 , , Xn )] = u(x1 , , xn ) f (x1 , , xn )dx1 dx2 dxn .
Rn
If E[u(X1 , , Xn )] exists, it is called the mathematical expectation (or expected val-

ue) of u(X1 , , Xn ).
Remark 1.5. E[u(X1 , , Xn )] exists if

|u(x1 , , xn )| f (x1 , , xn )dx1 dx2 dxn < .
Rn
Let fi (xi ) be the p.d.f. of Xi for i =

1, 2, , n.
(i) The mean of Xi is i := E(Xi ) = R xi fi (xi )dxi .
(ii) The variance of Xi is i2 := Var(Xi ) = E((Xi i )2 ) = R (xi i )2 fi (xi )dxi .
Here, i is the standard deviation of Xi .
(iii)

The covariance of Xi and X j is i j := Cov(Xi , X j ) = E((Xi i )(X j j )) =
R R (xi i )(x j j ) f i, j (xi , x j )dxi dx j .
(iv) If i > 0 and j > 0, then
Cov(Xi , X j ) i j
(Xi , X j ) = =
Var(Xi )Var(X j ) i j
is called the correlation coefficient of Xi and X j .

As the discrete case, we say that Xi and X j are uncorrelated if Cov(Xi , X j ) = 0,
where
Cov(Xi , X j ) = E(Xi X j ) i j .
Example 1.18. Let X have the N( , 2 ) distribution. Then,
[ ]
x (x )2
E(X) = exp dx
2 2 2
[ 2]
s + s
= exp d(s + ) (letting s = (x )/ )
2 2
[ 2] [ 2]
s s 1 s
= exp ds + exp ds.
2 2 2 2
The first integrand is an odd function, and so the integral over R is zero. The second
integrand is one by some algebra. Hence, E(X) = .
Example 1.19. Let X have density f (x) = ( 1)x for x 1 and > 1. Then,
n
1 1
E(X) = x dx = ( 1) lim dx.
1 x n 1 x 1
When 2 (i.e., 1 1), E(X) = . When > 2, it is not hard to see that
1
E(X) = .
2
22 1 Basic concepts
Property 1.9. Let X be a continuous random variable, a and b be constants, and g

and h be functions. Then,
(i) if g(X) and h(X) have finite mean then
E(ag(X) + bh(X)) = aE(g(X)) + bE(h(X));
(ii) if P(a X b) = 1, then a E(X) b;

(iii) if h is non-negative, then for a > 0, P(h(X) a) E(h(X)/a);
(iv) if g is convex, then g(E(X)) E(g(X)).
Proof. (i) The proof is left as an exercise.

(ii) Since F(b) F(a) = P(a X b) = 1 and F(x) [0, 1] for any x R, it
follows that F(b) = 1 and F(a) = 0. By the monotonicity of F(x), we know that
F(x) = 1 for x b, and F(x) = 0 for x a. Therefore,
a a

x f (x)dx |x| f (x)dx

a
= lim |x| f (x)dx
n n
a
lim max(|n|, |a|) f (x)dx
n n
= lim max(|n|, |a|)(F(a) F(n)) = 0.
n

Similarly, we can show that | b x f (x)dx| = 0. Hence,
a b
E(X) = x f (x)dx = x f (x)dx + x f (x)dx + x f (x)dx
a b
b
= x f (x)dx.
a
Note that
b b
x f (x)dx a f (x)dx = a(F(b) F(a)) = a,
a a
b b
x f (x)dx b f (x)dx = b(F(b) F(a)) = b.
a a
It follows that a E(X) b.

(iii) Note that
( ) ( )
h(X) h(X)
P(h(X) a) = E(I(h(X) a)) E I(h(X) a) E ,
a a
where the last inequality holds since h(X)/a is non-negative.

(iv) The proof is omitted.
1.5 Expectation 23
Property 1.10. Let X be a non-negative random variable with c.d.f. F, p.d.f f , and
finite expected value E(X). Then, if limn n(F(n) 1) = 0,

E(X) = (1 F(x))dx.
0
Proof. Note that

E(X) = x f (x)dx
0
n
= lim x f (x)dx
n 0
n
= lim xdF(x)
n 0
[ n ]
= lim nF(n) F(x)dx (integration by parts)
n 0
[ n ]
= lim n(F(n) 1) + (1 F(x))dx ,
n 0

which follows that E(X) = 0 (1 F(x))dx.

Property 1.11. Let a, b, c, and d be constants. Then,
(i) E(X 2 ) = 0 if and only if P(X = 0) = 1;
(ii) Cov(aX + b, cY + d) = ac Cov(X,Y );
(iii) Var(X +Y ) = Var(X) + Var(Y ) + 2Cov(X,Y );
(iv) if X and Y are independent, E(h(X)g(Y )) = E(h(X))E(g(Y )) provided that
E(h(X)) < and E(g(Y )) < .
(v) 1 (X,Y ) 1;
(vi) | (X,Y )| = 1 if and only if P(X = aY + b) = 1 for some constants a and b;
(vii) (aX + b, cY + d) = sgn(ac) (X,Y ), where sgn(x) denotes the sign of x;
(viii) if X and Y are independent, (X,Y ) = 0.
Proof. (i) The proof of the if part is directly from Property 1.9(ii). We now give
the proof of the only if part. Suppose that P(X = 0) < 1. Then, there exists con-
stants a and b such that b a > 0 and P(a |X| b) > 0. Hence,
E(X 2 ) = E(X 2 I(a |X| b)) + E(X 2 I(|X| < a)) + E(X 2 I(|X| > b))
E(X 2 I(a |X| b))
a2 E(I(a |X| b))
= a2 P(a |X| b) > 0,
which is contradict with the condition that E(X 2 ) = 0. This completes the proof of
(i).
The proofs of remaining parts are left as an excise. (Hint: the proof of (v) and (vi)
relies on the Cauchy-Schwarz inequality below to the random variables X E(X)
and Y E(Y )).
24 1 Basic concepts
Property 1.12. (Cauchy-Schwarz inequality) If E(X 2 )E(Y 2 ) < , then

E(XY ) E(X 2 )E(Y 2 ).
Proof. Without loss generality, we assume that E(Y 2 ) > 0. Note that
[ ] [ ]
0 E (XE(Y 2 ) Y E(XY ))2 = E(Y 2 ) E(X 2 )E(Y 2 ) (E(XY ))2 .
Hence, the conclusions holds.

Chapter 2
Preliminary
Abstract This chapter talks about the moment generating function and some im-
portant convergence, including the the law of large number theory and central limit
theory. The moment generating function is one-to-one corresponding to the cumu-
lative distribution function, and hence it can determine the distribution of a random
variable. In many applications, the expected value of a random experiment is partic-
ularly important, and it is estimated by the sample mean. The law of large number
theory makes sure that the sample mean is a rational estimate of the expected value,
and the variation of this estimate can be measured by the central limit theory.
2.1 Moment generating function
Let r be a positive integer. The r-th moment about the origin of a random variable X
is defined as r = E(X r ). In order to calculate r , we can make use of the moment
generating function (m.g.f.).
Definition 2.1. (Moment Generating Function) A moment generating function of X

is a function of t R defined by MX (t) = E(etX ) if exists.
Property 2.1. Suppose MX (t) exists. Then,

( r)
(1) MX (t) = r tr! ;
r=0
(r)
(2) r = MX (0) for r = 1, 2, . . .;
(3) For constants a and b, MaX+b (t) = ebt MX (at).
Proof. (1) For a discrete random variable X we have

r r
(tx)r t t
MX (t) = etx P(X = x) = P(X = x) = xr P(X = x) = r .
x x r=0 r! r=0 r! x r=0 r!
25
26 2 Preliminary
For a continuous random variable X, the proof is similar by using integrals instead
of sums.
(2) Make use of (1).
[ ]
(3) MaX+b (t) = E e(aX+b)t = ebt E(eatX ) = ebt MX (at).

From parts (1)-(2) above, we have

(t ) ( 2) ( 3)
(1) (2) t (3) t
MX (t) = MX (0) + MX (0) + MX (0) + MX (0) + ,
1! 2! 3!
which is called the Maclaurins series of MX (t) around t = 0. If the Maclaurins

series expansion of MX (t) can be found, the r-th moment r is the coefficient of
t r /r!; or if MX (t) exists and the moments are given, we can frequently sum the
Maclaurins series to obtain the closed form of MX (t).
Property 2.2. If MX (t) exists, there is a one-to-one correspondence between MX (t)

and the p.d.f. f (x) (or c.d.f. F(x)).
Proof. The proof is omitted.

The above property shows that we can decide the distribution of X by calculating
its m.g.f.
Example 2.1. The moment generating function of N( , 2 ) is

+ (x )2
1
E(etX ) = etx e 2 2 dx
2
+ ( )
1 2 2tx + x2 2 x + 2
= exp dx
2 2 2
( ) + ( )
2 2t 4t 2 1 (x 2t)2
= exp exp dx
2 2 2 2 2
( )
1
= exp t + 2t 2 ,
2
( )
2 t)2
because 21 exp (x2 2 is the density function of N( + 2t, 2 ).
Example 2.2. Find the moment generating function of a random variable X follow-
ing a Poisson distribution with mean .
Solution.

e x ( et )x
etx P(X = x) = etx = e = e e e
t
MX (t) = E(etX ) =
x=0 x=0 x! x=0 x!
= e (e 1) .
t

2.1 Moment generating function 27
Example 2.3. Find the moment generating function of a random variable which has
a (probability) density function given by
{
ex , for x > 0;
f (x) =
0, otherwise,
and then use it to find 1 , 2 , and 3 .
Solution.
MX (t) = E(etX )
+
(t1)x
+ + e 1
= , for t < 1;
= etx f (x)dx = etx ex dx = t 1 1t
0
0
does not exist, for t 1.
Then,

(1) 1
1 = MX (0) = = 1,
(1 t)2 t=0

(2) 2
2 = MX (0) = = 2,
(1 t)3 t=0

(3) 2 3
3 = MX (0) = = 3!.
(1 t)4 t=0

Property 2.3. If X1 , X2 , . . . , Xn are independent random variables, MXi (t) exists for
i = 1, 2, , n, and Y = X1 + X2 + + Xn , then MY (t) exists and
n
MY (t) = MXi (t).
i=1
Proof. The proof is left as an excise.

Example 2.4. Find the probability distribution of the sum of n independent random
variables X1 , X2 , . . . , Xn following Poisson distributions with means 1 , 2 , . . . , n re-
spectively.
Solution. Let Y = X1 + X2 + + Xn . Then,

n n
MY (t) = MXi (t) = ei (e 1) = e(e 1) i=1 i ,
t t n
i=1 i=1
which is the m.d.f. of a Poisson random variable with mean ni=1 i . Therefore, by
Example 2.2 and Property 2.3, Y follows the Poisson distribution with mean ni=1 i .
28 2 Preliminary
Example 2.5. For positive numbers and , find the moment generating function
of a gamma distribution Gamma( , ) of which the density function is given by
1 x
x e
, for x > 0;
f (x) = ( )

0, otherwise.
Solution.
+
tX x 1 e x
MX (t) = E(e ) = etx dx
0 ( )
+

= x 1 e( t)x dx
0 ( )

+ ( t)
=
x 1 e( t)x dx
( t) 0 ( )

, for t < ;
= ( t)

does not exist, for t ,
where +
( t) 1 ( t)x
x e dx = 1
0 ( )
is due to the fact that
( t) 1 ( t)x
x e for x > 0
( )
is the density function of a Gamma( , t) distribution.

Example 2.6. Find the distribution of the sum of n independent random variables
X1 , X2 , . . . , Xn where Xi follows Gamma(i , ), i = 1, 2, . . . , n, with the p.d.f. given
by 1 x
ix i e
, for x > 0;
f (x) = (i )

0, otherwise.
Solution. From the previous example, we know that the moment generating function
of Xi is ( )i

MXi (t) = for t < , i = 1, 2, . . . , n.
t
Hence, the moment generating function of X1 + X2 + + Xn is
( )1 +2 ++n
n

Xi M (t) =
t
for t < .
i=1
2.2 Convergence 29
Therefore, X1 + X2 + + Xn follows a Gamma(1 + 2 + + n , ) distribution.
Example 2.7. Prove that the sum of n independent random variables X1 , X2 , . . . , Xn

each following a Bernoulli distribution with parameter p follows B(n, p), the bino-
mial distribution with parameters n and p.
Proof. On one hand, for i = 1, 2, . . . , n, MXi (t) = e0t P(Xi = 0) + e1t P(Xi = 1) =
(1 p) + et p = 1 p + pet , and hence the moment generating function of X1 + X2 +
+ Xn is
n
MXi (t) = (1 p + pet )n .
i=1
On the other hand, the moment generating function of B(n, p) is

n ( ) n ( )
tx n n
x e p x
(1 p)nx
= x (pet )x (1 p)nx = (pet + 1 p)n .
x=0 x=0
Therefore, X1 + X2 + + Xn follows a B(n, p) distribution.

2.2 Convergence
Functions of random variables are of interest in statistical applications. Usually,

functions of random sample X = {X1 , , Xn } are called statistics. Two important
statistics are the sample mean X and the sample variance S2 , where
1 n
X= Xi ,
n i=1
1 n
S2 = (Xi X)2 .
n i=1
Although in a particular sample, say x1 , , xn , we observe definite values of these

statistics, x and s2 , we should recognize that each value is only one observation of
the respective random variables X and S2 . That is, each X or S2 is also a random
variable with its own distribution.
Suppose that the random sample X from a distribution F(x) with mean = E(X)
and variance 2 = Var(X). When n is large, Theorem 1.7 shows that F(x) can be
well approximated by Fn (x). Meanwhile, we can easily show that X and S2 are the
mean and variance of a random variable from a distribution Fn (x). Therefore, it is
expected that when n is large, and 2 can be well approximated by X and S2 ,
respectively.
Definition 2.2. (Convergence in probability) Let (Zn ; n 1) be a sequence of ran-
dom variables. We say the sequence Zn converges in probability to Z if, for any
> 0,
30 2 Preliminary
P(|Zn Z| > ) 0 as n .
For brevity, this is often written as Zn p Z.
Theorem 2.1. (Weak law of large numbers) Let (Xn ; n 1) be a sequence of inde-
pendent random variables having the same finite mean and variance, = E(X1 )
and 2 = Var(X1 ). Then, as n ,
X p .
It is customary to write Sn = ni=1 Xi for the partial sums of the Xi .
Proof. It suffices to show that for any > 0,

( )
1
P Sn > 0 as n . (2.1)
n
By Chebyshovs inequality below, we have

( ) [( )2 ]
1 1 1

P Sn > 2 E Sn
n n
( )2
1 1 n
= 2E
(Xi )
n i=1
( )2
n
1
= 2 2 E (Xi ) .
n i=1
By the independence of (Xn ; n 1), we can obtain that

( ) [ ]
2
n n n
E (Xi ) =E (Xi )(X j )
i=1 i=1 j=1
[ ] [ ]
n n n
=E (Xi ) 2
+E (Xi )(X j )
i=1 i=1 j=i, j=1
[ ]
n
=E (Xi )2 (by Property 1.11(iv))
i=1
= n 2 .
Thus, it follows that

( )
1 n 2 2
P Sn > 2 2 = 2 0 as n ,
n n n
which implies that (2.1) holds. This completes the proof.

2.2 Convergence 31
Property 2.4. (Chebyshovs inequality) Suppose that E(X 2 ) < . Then, for any con-
stant a > 0,
E(X 2 )
P(|X| a) .
a2
Proof. This is left as an excise.

Property 2.5. If Xn p and Yn p , then (i) Xn +Yn p + ; (ii) XnYn p ;
(iii) Xn /Yn / if Yn = 0 and = 0; (iv) g(Xn ) p g( ) for a continuous function
g().
Proof. The proof is omitted.

Example 2.8. Let (Xn ; n 1) be a sequence of independent random variables having
the same finite mean = E(X1 ), finite variance 2 = Var(X1 ), and finite fourth
moment 4 = E(X14 ). Show that
S2 p Var(X1 ).
Definition 2.3. (Convergence in distribution) Let (Zn ; n 1) be a sequence of ran-

dom variables. We say the sequence Zn converges in distribution to Z if, as n ,
Gn (x) G(x) whereever F(x) is continuous.
Here, Gn (x) and G(x) are the c.d.f. of Zn and Z, respectively.

Theorem 2.2. (Central limit theorem) Let (Xn ; n 1) be a sequence of independent
random variables having the same finite mean and variance, = E(X1 ) and 2 =
Var(X1 ). Then, as n ,

X E(X) n(X )
= d N(0, 1).
Var(X)
To prove the above central limit theorem, we need the following lemma:
Lemma 2.1. If
1. MZn (t), the moment generating function of Zn , exists, n = 1, 2, . . .,
2. lim MZn (t) exists and equals the moment generating function of a random vari-
n
able Z,
then
lim GZn (x) = GZ (x) for all x at which GZ (x) is continuous,
n
where GZn (x) is the distribution function of Zn , n = 1, 2, . . ., and GZ (x) is the distri-
bution function of Z.
Proof. As (Xn ; n 1) is a sequence of independent random variables having the
same finite mean = E(X1 ) and finite variance 2 = Var(X1 ), simple algebra gives
us that
32 2 Preliminary
1 n 2
E(X) =
n i=1
E(Xi ) = and Var(X) = E[(X)2 ] [E(X)]2 =
n
.
Hence, it suffices to show that

n(X )
Zn = d N(0, 1). (2.2)

Xi
A heuristic proof for (2.2) is based on Lemma 2.1. Let Yi = , then E(Yi ) =

0 and Var(Yi ) = 1 and suppose the moment generating function MYi (t) exists. A
Taylors expansion of MYi (t) around 0 gives:
(1) t 2 (2)
MYi (t) = MYi (0) + tMYi (0) + M ( ), for some 0 t.
2 Yi
Since Zn = 1 ni=1 Yi , then the moment generating function of Zn is thus given by
n
n ( )
t
MZn (t) = MYi
i=1 n
[ ( )]n
t
= MYi
n
[ ]n
t (1) (t/ n)2 (2)
= MYi (0) + MYi (0) + MYi ( )
n 2
[ ]n
t t 2 (2)
= 1 + E(Yi ) + MYi ( )
n 2n
[ 2 ]n
t (2)
= 1 + MYi ( ) ,
2n
(2) (2)
where 0 t/ n. As n , 0 and MYi ( ) MYi (0) = E(Yi2 ) = 1. Hence,
( )n ( 2) ( )
t2 t 1
lim MZn (t) = lim 1 + = exp = exp 0 t + 1 t 2
n n 2n 2 2
which is the moment generating function of N(0, 1) random variable. Hence, the
conclusion follows directly from Lemma 2.1.

Chapter 3
Point estimator
Abstract In many applications, a random variable X resulting from a random ex-

periment is assumed to have a certain distribution with the p.d.f. f (x; ), where
R s is a unknown parameter taking value in a set , and is usually called the
parameter space. For example, X is often assumed to follow a normal distribution
N( , 2 ); in this case = ( , ) is the unknown parameter, and the parameter
space = {( , ) : R, > 0}. For the experimenter, the important question is
how to find a good estimator for the unknown parameter . Heuristically, a ran-
dom sample X = {X1 , X2 , , Xn }, which forms an empirical distribution, can elicit
information about the distribution of X. Hence, it is natural to expect that we can
estimate the unknown parameter based on a random sample X.
3.1 Maximum likelihood estimator
We first consider the maximum likelihood estimator, which is motivated by a simple

example below.
Example 3.1. Suppose that X follows a Bernoulli distribution so that the p.d.f. of X
is
f (x; p) = px (1 p)1x , x = 0, 1,
where the unknown parameter p with = {p : p (0, 1)}. Further, assume
that we have a random sample X = {X1 , X2 , , Xn } with the observable values x =
{x1 , x2 , , xn }, respectively. Then, the probability that X = x is
L(x1 , , xn ; p) = P(X1 = x1 , X2 = x2 , , Xn = xn )
n
= pxi (1 p)1xi = pi=1 xi (1 p)ni=1 xi ,
n n
i=1
which is the joint p.d.f. of X1 , X2 , , Xn evaluated at the observed values. The joint
p.d.f. is a function of p. Then, we want to find the value of p that maximizes this
33
34 3 Point estimator
joint p.d.f., or equivalently, we want to find p such that
p = arg max L(x1 , , xn ; p).

p
The way to propose p is reasonable because p most likely has produced the sample
values x1 , , xn . We call p the maximum likelihood estimate, since likelihood
is often used as a synonym for probability in informal contexts.
Conventionally, we denote L(p) = L(x1 , , xn ; p), and p is easier to be com-
puted by
p = arg max log L(p).
p
[Note that p maximizes log L(p) also maximizes L(p)]. By simple algebra (see one
example below), we can show that
1 n
p = xi ,
n i=1
which maximizes log L(p). The corresponding statistic, namely n1 ni=1 Xi , is

called the maximum likelihood estimator (MLE) of p; that is,
1 n
p = Xi .
n i=1
Note that E( p p)2 0 as n . Thus, p is a good estimator of p in some sense.
Definition 3.1. (Likelihood Function) Let X be a random sample from a distribution

with p.d.f. f (x1 , , xn ; ) with parameter , where the parameter is within a
certain parameter space . Then, the likelihood function of this random sample is
defined as
L( ) = f (X; ) = f (X1 , X2 , , Xn ; )
for . Moreover, ( ) = log L( ) is called the log-likelihood function.
Definition 3.2. (Maximum Likelihood Estimator) Given a likelihood function L( )

for , the maximum likelihood estimator (MLE) of is defined as
= arg max L( ) = arg max ( ).

Definition 3.3. (Maximum Likelihood Estimate) The observed value of is called

the maximum likelihood estimate.
Example 3.2. Let X be an independent random sample from a Bernoulli distribution

with parameter p with 0 < p < 1. Find the maximum likelihood estimator of p.
Solution. For the random sample X, the likelihood function is

3.1 Maximum likelihood estimator 35
n
L(p) = pXi (1 p)1Xi .
i=1
Hence, the log-likelihood function is

n
(p) = ln L(p) = [Xi ln p + (1 Xi ) ln(1 p)]
i=1
n n
= ln p Xi + ln(1 p) (1 Xi ).
i=1 i=1
Note that
( )
d(p) 1 n 1 n
= Xi n Xi
dp p i=1 1 p i=1
n n
(1 p) Xi np + p Xi
i=1 i=1
=
p(1 p)
n(X p)
= .
p(1 p)
It is not hard to see that

d(p)
p < X >0
dp
and
d(p)
p > X < 0,
dp
which imply that (p) attains its maximum at p = X. Therefore, the maximum like-
lihood estimator of p is X.
Example 3.3. Let X be an independent random sample from a uniformly distribution

over the interval [0, ]. Find the maximum likelihood estimator of .
Solution. Note that a uniformly distribution over the interval [0, ] has the p.d.f.
given by
1 , for 0 x , 1
f (x; ) = = I(0 x ).

0, otherwise,
For the random sample X, the likelihood function is
n
1 1 n
L( ) = I(0 Xi ) = n I(0 Xi ).
i=1 i=1
In order that L( ) attains its maximum, must satisfy

0 Xi , i = 1, 2, . . . , n.
1
Since increases as decreases, we must select to be as small as possible sub-
n
ject to the previous constraint. Therefore, the maximum of L( ) should be selected
to be the maximum of X1 , X2 , . . . , Xn , that is, the maximum likelihood estimator
= X(n) = max1in Xi .
Example 3.4. Let X be an independent random sample from N(1 , 2 ), where (1 , 2 )

and = {(1 , 2 ) : 1 R, 2 > 0}. Find the MLEs of 1 and 2 . [Note: here
we let 1 = and 2 = 2 ].
Solution. Let = (1 , 2 ). For the random sample X, the likelihood function is

[ ]
n
1 (Xi 1 )2
L( ) = exp .
i=1 22 22
Then, the log-likelihood function is
n n (Xi 1 )2
( ) = log L( ) = log(22 ) i=1 .
2 22
As the MLE is the maximizer of ( ), it should satisfy that
( ) 1 n
0=
1
= (Xi 1 ),
2 i=1
( ) n 1 n
0= = + 2 (Xi 1 )2 .
2 22 22 i=1
Solving the two equations above, we obtain that
1 n 1 n
1 = X =
n i=1
Xi and 2 = S2 = (Xi X)2 .
n i=1
By considering the usual condition on the second partial derivatives, these solutions
do provide a maximum. Thus, the MLEs of 1 and 2 are
1 = X and 2 = S2 ,
respectively.

3.2 Method of moments estimator
The method of moments estimator is often used in practice, especially when we do

not know the full information about X except for its certain moments. Recall that
3.2 Method of moments estimator 37
the r-th moment about the origin of X is defined as r = EX r . In many situations,

r contains the information about the unknown parameter . For example, if X
N( , 2 ), we know that
1 = EX = and 2 = EX 2 = Var(X) + [E(X)]2 = 2 + 2 .
or
= 1 and 2 = 2 12 .
That is, the unknown parameters and 2 can be estimated if we find good
estimators for 1 and 2 . Note that by the weak low of large numbers (see Theorem
2.1),
1 n 1 n
m1 =
n i=1
Xi p E(X) = 1 and m2 = Xi2 p E(X 2 ) = 2 .
n i=1
Thus, it is reasonable to estimate and 2 by m1 and m2 m21 , respectively, and

these estimators are called the method of moments estimator.
To generalize the idea above, we assume that the unknown parameter R s can
be expressed by
= h(1 , 2 , , k ), (3.1)
where h : R k R s . For the illustrating example above, s = 2, k = 2, = ( , 2 )

and h = (h1 , h2 ) with
h1 (1 , 2 ) = 1 and h2 (1 , 2 ) = m2 m21 .
Define the r-th sample moment of a random sample X by
1 n r
mr = Xi ,
n i=1
r = 1, 2, . . . .
Unlike r , mr always exists for any positive integer r. In view of (3.1), the method
of moments estimator (MME) of is defined by
= h(m1 , m2 , , mk ),
and the observed value of is called the method of moments estimate.

Example 3.5. Let X be an independent random sample from a gamma distribution
with the p.d.f. given by
1 x
x e
, for x > 0;
f (x) = ( )

0, otherwise.
Find a MME of ( , ).
Solution. Some simple algebra shows that the first two moments are
2 +
1 = and 2 = .
2
[Note: 1 and 2 can be obtained from Example 2.6.] Substituting = 1 in the
second equation, we get
( 1 )2 + 1 1 1
2 = = 12 + or = ,
2 2 12
which implies that

(1 )2
= 1 = .
2 (1 )2
Therefore, one MME of ( , ) is ( , ), where
2
m21 X m1 X
= = and = = .
m2 m21 1 n 2 m2 m21 1 n 2
Xi X Xi X
2 2
n i=1 n i=1
It is worth noting that the way to construct h in (3.1) is not unique. Usually, we
use the lowest possible order moments to construct f , although this is may not be
the optimal way. To consider the optimal MME, one may refer to the generalized
method of moments estimator for a further reading.
3.3 Estimator properties
For the same unknown parameter , many different estimators may be obtained.
Heuristically, some estimators are good and others bad. The question is how would
we establish a criterion of goodness to compare one estimator with another? The
particular properties of estimators that we will discuss below are unbiasedness, effi-
ciency, and consistency.
3.3.1 Unbiasedness
Suppose that is an estimator of . If is a good estimator of , a fairly desirable

property is that its mean be equal to , namely, E( ) = . That is, in practice, we
would want E(Y ) to be reasonably close to .
Definition 3.4. (Unbiased estimator) The bias of an estimator is defined as

3.3 Estimator properties 39
Bias( ) = E( ) .
If Bias( ) = 0, is called an unbiased estimator of . Otherwise, it is said to be

biased.
Definition 3.5. (Asymptotically unbiased estimator) is an asymptotically unbi-

ased estimator if
lim Bias( ) = lim [E( ) ] = 0,
n n
where n is the sample size.
Example 3.3. (cont) (i) Show that = X(n) is an asymptotically unbiased estimator
of ; (ii) modify this estimator of to make it unbiased.
Solution. Let Y = X(n) . For 0 y ,

n ( )n
y
P(Y y) = P(Xi y) = .
i=1
Thus, by Property 1.10,

[ ( )n ]
y n+1
E(Y ) = P(Y > y)dy = 1 dy =
0 0 (n + 1) n
n
= as n ,
n+1
which implies that Y is an
( asymptotically
) unbiased estimator of .
n+1 n+1
Furthermore, since E Y = , we know that Y is an unbiased esti-
n n
mator of .

Example 3.4. (cont) Show that X is an unbiased estimator of 1 , and S2 is an

asymptotically unbiased estimator of 2 .
Solution. As each Xi N(1 , 2 ), we have
1 n 1 n
E(X) =
n i=1
E(Xi ) = 1 = 1 .
n i=1
Hence, X is an unbiased estimator of 1 .

Next, it is easy to see that
[ ]
1 n 1 n [ ]
2
E(S ) = E
n i=1
(Xi X) = E (Xi X)2 .
2
n i=1
Note that for each i, we have

[ ] [ ]
E (Xi X)2 = E (X1 X)2
= Var(X1 X) (since E(X1 X) = 0)
( )
X1 + X2 + + Xn
= Var X1
n
( )
(n 1)X1 n
Xi
= Var
n i=2 n
(n 1)2 (n 1)
= 2 + 2 (by the independence among Xi s)
n2 n2
n1
= 2 .
n
Hence, it follows that
1 n [ ] n1
E(S2 ) = E (Xi X)2 = n 2 .
n i=1
As limn E(S2 ) = 2 , S2 is an asymptotically unbiased estimator of 2 .

3.3.2 Efficiency
Suppose that we have two unbiased estimators and . The question is how to
compare and in terms of a certain criterion. To answer this question, we first
introduce the so-called mean squared error of a given estimator .
Definition 3.6. (Mean squared error) Suppose that is an estimator of . The mean
squared error of is [( )2 ]
MSE( ) = E .
For a given estimator , MSE( ) is the mean (expected) value of the square of
the error (difference) . This criterion can be decomposed by two parts as shown
below.
Property 3.1. If Var( ) exists, then the mean squared error of is
[ ]2
MSE( ) = Var( ) + Bias( ) .
Proof.
[( )2 ]
MSE( ) = E
({[ ] [ ]}2 )
=E E( ) + E( )
([ ]2 [ ][ ] [ ]2 )
= E E( ) + 2 E( ) E( ) + E( )
[ ][ ] [ ]2
= Var( ) + 2E E( ) E( ) + Bias( )
[ ]2
= Var( ) + Bias( ) .

Remark 3.1. The following result is straightforward:
lim MSE( ) = 0 lim Var( ) = 0 and lim Bias( ) = 0.

n n n
Heuristically, one want MSE( ) as small as possible. As we discussed above, the

unbiasedness is the desirable property for a certain estimator . Thus, it is reason-
able to restrict our attention to only the unbiased estimator . In this case,
MSE( ) = Var( )
by Property 3.1. Now, for two unbiased estimators and , we only need to se-
lect the one with a smaller variance, and this motivates us to define the efficiency
between and .
Definition 3.7. (Efficiency) Suppose that and are two unbiased estimators of .
The efficiency of relative to is defined by
Var( )
Eff ( , ) = .
Var( )
If Eff ( , ) > 1, then we say that is relatively more efficient than .

Example 3.6. Let (Xn ; n 1) be a sequence of independent random variables having
the same finite mean and variance, = E(X1 ) and 2 = Var(X1 ). We can show that
X is an unbiased estimator of , and Var(X) = n . Suppose that we now take two
2
(1)
samples, one of size n1 and one of size n2 , and denote the sample means as X and
(2)
X , respectively. Then,
(2)
(1) (2) Var(X ) n1
Eff (X ,X )= (1)
= .
Var(X ) n2
Therefore, the larger is the sample size, the more efficient is the sample mean for
estimating .
n+1
Example 3.3. (cont) Note that Y is an unbiased estimator of , where Y is the
n
n-th order statistic. Show that
(i) 2X is also an unbiased estimator of ;
(ii) Compare the efficiency of these two estimators of .
Solution. (i) Since E(X) equals the population mean, which is /2, E(2X) = .
Thus, 2X is an unbiased estimator of .
(ii) First we must find the variance of the two estimators. Before, we have already
obtained ( )n
y
P(Y y) = for 0 y .

Therefore, for Z = Y 2 , it is not hard to show that
( )n
z
P(Z z) = P(Y z) = for 0 z 2 .

By Property 1.10, we have

2 ( )n
z
E(Z) = 1 dz
0
( )
yn
=2 y 1 n dy (by setting y = z)
0
( n+1
)
y
=2 y n dy
0
[ 2 ]
n+2
=2
2 (n + 2) n
n
= 2.
n+2
Or by a direct calculation, we can show that

yn n n n+2 n
E(Z) = y2 d = yn+1 dy = = 2.
0 n n 0 n n+2 n+2
Hence,
( ) [( ) ] [ ( )]2
n+1 n+1 2 n+1
Var Y =E Y E Y
n n n
( )2
n+1 n
= 2 2
n n+2
( 2 )
n + 2n + 1
= 1 2
n2 + 2n
2
= .
n(n + 2)
Since Var(Xi ) = 2 /12 for each i, we have
2 2
Var(2X) = 4Var(X) = 4 = .
12n 3n
Therefore,
( )
n+1 Var(2X) n+2
Eff Y, 2X = ( )= .
n Var n+1
n Y 3
Thus, it can be seen that, for n > 1, n+1

n Y is more efficient than 2X, and for n = 1,
n+1
n Y and 2X have the same efficiency.

From Definition 3.7, we are interested in finding an unbiased estimator , which

has the smallest variance among all unbiased estimators. This desirable estimator is
usually called the uniformly minimum variance unbiased estimator (UMVUE), that
is,
UMVUE = arg min Var( ).
is unbiased
Clearly, a UMVUE is relative more efficient than any other unbiased estimators.
Intuitively, how to find the UMVUE is not an easy task. But in many cases,
Var( ) has a lower bound for all unbiased estimators; therefore, if the variance of
any unbiased estimator achieves this lower bound, it must be a UMVUE.
In summary, we can conclude that an unbiased estimator is a UMVUE, if we
can show that
(i) Var( ) has a lower bound for all unbiased estimators; (3.2)
(ii) the variance of achieves this lower bound. (3.3)
It is worth noting that conditions (3.2)-(3.3) are not necessary for the UMVUE, since
there are some cases that the UMVUE can not achieve the lower bound in (3.2).
To consider the lower bound of Var( ), we need introduce the so-called Fisher
information.
Definition 3.8. (Fisher information) The Fisher information about is defied as

[( ) ]
( ) 2
In ( ) = E ,

where ( ) = ln L( ) is the log-likelihood function of the random sample.
Theorem 3.1. Let X1 , X2 , . . . , Xn be an independent random sample from a popula-

tion with the p.d.f. f (x; ). Then, under certain regularity conditions, we have the
following conclusions.
(i) In ( ) = nI( ), where
[( ) ]
ln f (X; ) 2
I( ) = E ,

and X has the same

[ 2 distribution] as the population;
ln f (X; )
(ii) I( ) = E ;
2
(iii) Cramer-Rao inequality:
1
Var( ) ,
In ( )
where is an unbiased estimator of , and 1

In ( ) is called the Crammer-Rao lower
bound (CRLB).
Proof. (i) Let ln f (X;

)
be the score function. Under certain regularity conditions,
it can be shown that the first moment of the score is
[ ] [ ]

ln f (X; ) f (X; ) f (x; )
E =E = f (x; )dx
f (X; ) f (x; )

= f (x; )dx = f (x; )dx = 1 = 0.

Hence, by the independence of X1 , , Xn , it follows that
[( ) ]
( ) 2
In ( ) = E

( )2
n
ln f (X ; )
= E
i
i=1

[ ( ) ]
n
ln f (Xi ; ) 2 n n
ln f (X ; ) ln f (X ; )
=E + E
i j
i=1 i=1 j=1 and j=i

[ ( ) ]
n
ln f (Xi ; ) 2
=E
i=1
= nI( ).
(ii) Under certain regularity conditions, it can be shown that

[ 2 ]

E ln f (X; )
2
( )2
2 f (x; )
2 f (x; )
= f (x; )dx
f (x; ) f (x; )
( )2
2
= f (x; )dx ln f (x; ) f (x; )dx
2

2
= f (x; )dx I( )
2
2
= 1 I( ) = I( ).
2
(iii) Let L( ) := L(x1 , , xn ; ) = f (x1 ; ) f (xn ; ) be the joint p.d.f. of

(X1 , , Xn ). For any unbiased estimator , we can write = g(X1 , , Xn ) for some
functional g. Then, we have

0 = E( ) = [g(x1 , , xn ) ]L( )dx1 dxn .
Differentiating both sides of the preceding equation, we obtain that

L( )
0= L( ) + [g(x1 , , xn ) ] dx1 dxn ,

which implies that

L( )
1= [g(x1 , , xn ) ] dx1 dxn .

Using the Cauchy-Schwarz Inequality: ( s1 (x)g1 (x)dx)2 s21 (x)dx s22 (x)dx, we
have
{ }2
L( )
1= [g(x1 , , xn ) ] dx1 dxn

{
[ ] }2
1 L( )
= [g(x1 , , xn ) ] L( ) dx1 dxn
L( )
{ [ ] }2
log L( )
= [g(x1 , , xn ) ] L( ) L( ) dx1 dxn

( )
log L( ) 2
[g(x1 , , xn ) ]2 L( )dx1 dxn L( ) dx1 dxn .

Hence, it gives us that 1 Var( ) In ( ), which implies that the Cramer-Rao in-
equality holds.
1
Corollary 3.1. If is an unbiased estimator of and Var( ) = , then is a
In ( )
UMVUE of .
Example 3.7. Show that X is a UMVUE of the mean of a normal population

N( , 2 ).
Solution. For < x < ,

[ ( ) ]
1 1 x 2
f (x; ) = exp ,
2 2
which implies that

( )2
1 x
ln f (x; ) = ln( 2 ) ,
2
ln f (x; ) x
and = .
2
Therefore,
[( )2 ] [ ]
ln f (X; ) (X )2 1
I( ) = E =E = 2
4
or [ ] ( )
2 ln f (X; ) 1 1
I( ) = E = E = 2.
2 2
Hence,
1 1 2
CRLB = = = .
In ( ) nI( ) n
2
Recall that E(X) = and Var(X) = n . Thus, X is a UMVUE of .

Example 3.8. Show that X is a UMVUE of the parameter of a Bernoulli popula-

tion.
Solution. For x = 0 or 1,
f (x; ) = x (1 )1x ,
which implies that
ln f (x; )
= [x ln + (1 x) ln(1 )]

x 1x
=
1
x 1
= .
(1 ) 1
Noting that [ ]
X 1
E = ,
(1 ) 1
we have
[( )2 ] [ ]
ln f (X; ) X (1 ) 1
I( ) = E = Var = 2 = .
(1 ) (1 )2 (1 )
Hence,
1 1 (1 )
CRLB = = = .
In ( ) nI( ) n
(1 )
Since E(X) = and Var(X) = n , X is a UMVUE of .

If we know the full information about the population distribution X, the following
theorem tells us that the MLE tends to be the first choice asymptotically.
Theorem 3.2. Suppose that is the MLE of a parameter of a population distri-

bution. Then, under certain regular conditions, as n ,

d N(0, 1).
1/In ( )
1
If is an unbiased estimator of , the above theorem implies that Var( )
In ( )
when n is large. That is, the MLE can achieve the CRLB asymptotically.
3.3.3 Consistency
In the previous discussions, we have restricted our attention to the unbiased estima-
tor, and proposed a way to check whether an unbiased estimator is UMVUE. Now,
we introduce another property of the estimator called the consistency.
Definition 3.9. (Consistent estimator) is a consistent estimator of , if
p ,
that is, for any > 0,

( )
P | | > 0 as n .
Note that the definition of the convergence in probability is given in Definition

2.2.
Property 3.2. If is an unbiased estimator of a parameter and Var( ) 0 as

n , then is a consistent estimator of .
Property 3.3. If is an asymptotically unbiased estimator of a parameter and

Var( ) 0 as n , then is a consistent estimator of .
We shall mention that the unbiasedness along does not imply the consistency. A
toy example is as follows. Suppose that
= I(0 < X1 < 1/2) I(1/2 < X1 < 1),
where X1 U(0, 1). Then, E( ) = 0, i.e., is an unbiased estimator of = 0. But,

as takes value of either 1 or -1, p 0.
Property 3.4. If p and p , then

(i) p ;
(ii) p ;
(iii) / p / assuming that = 0 and = 0;
(iv) if g is any real-valued function that is continuous at , g( ) p g( ).
Example 3.9. Suppose that {X1 , , Xn } is a sequence of independent random vari-

ables having the same finite mean = E(X1 ), finite variance 2 = Var(X1 ), and
finite fourth moment 4 = E(X14 ). Show that X is a consistent estimator of , and
S2 is a consistent estimator of 2 .
Solution. Note that E(X) = and Var(X) = n 0 as n . Hence, by Property
2
3.2, X is a consistent estimator of (This is just the weak law of large numbers in
Theorem 2.1).
For S2 , we have
1 n 1 n 1 n
S2 =
n i=1
(Xi X)2 = (Xi2 + (X)2 2Xi X) = Xi2 (X)2 .
n i=1 n i=1
By the weak law of large numbers, we have
1 n 2
Xi p 2 = E(X12 ).
n i=1
As X p , Property 3.4(iv) implies that
(X)2 p 2 .
Therefore, by Property 3.4(i), S2 p 2 2 = 2 .

Remark 3.2. If {X1 , , Xn } is a sequence of independent N( , 2 ) random vari-

ables, we can show that
nS2
= n1
2
,
2
2
where k2 is a chi-square distribution with k degrees of freedom. Therefore, E( nS
2
)=
n 1, which implies that E(S ) = n as n . That is, S is an asymp-
2 n1 2 2 2
totically unbiased estimator of 2 .

2
Moreover, since Var( nS
2
) = 2(n 1), we can obtain that
( )
2 nS2 2 4 (n 1)
Var(S2 ) = Var = 0 as n .
n 2 n2
Hence, by Property 3.3, S2 is a consistent estimator of 2 .

Chapter 4
Interval Estimation
Abstract In previous section, we have learned how to construct a point estimator

for a unknown parameter , leading to the guess of a single value as the value of
. However, a point estimator for does not provide much information about the
accuracy of the estimator. It is desirable to generate a narrow interval that will cover
the unknown parameter with a large probability (confidence). This motivates us
to consider the interval estimator in this section.
4.1 Basic concepts
Definition 4.1. (Interval estimator) An interval estimator of is a random inter-

val [L(X),U(X)], where L(X) := L(X1 , , Xn ) and U(X) := U(X1 , , Xn ) are two
statistics such that L(X) U(X) with probability one.
Definition 4.2. (Interval estimate) If X = x is observed, [L(x),U(x)] is the interval
estimate of .
Although the definition is based on a closed interval [L(X),U(X)], it will some-
times be more natural to use an open interval (L(X),U(X)), a half-open and half-
closed interval (L(X),U(X)] (or [L(X),U(X))), or an one-sided interval (,U(X)]
(or [L(X), )).
The next example shows that compared to the point estimator, the interval estima-
tor can have some confidence (or guarantee) of capturing the parameter of interest,
although it gives up some precision.
Example 4.1. For an independent random sample X1 , X2 , X3 , X4 from N( , 1), con-
sider an interval estimator of by [X 1, X + 1]. Then, the probability that is
covered by the interval [X 1, X + 1] can be calculated by
( ) ( )
P [X 1, X + 1] = P X 1 X + 1
( )
= P 1 X 1
49
50 4 Interval Estimation
( )
X
= P 2 2
1/4
= P (2 Z 2)
0.9544,
where Z N(0, 1) and we have used the fact that X N( , 1/4). Thus, we have
over a 95% change of covering the unknown parameter with our interval estimator.
Note that for any point estimator of , we have P( = ) = 0. Sacrificing some
precision in the interval estimator, in moving from a point to an interval, has resulted
in increased confidence that our assertion about is correct.
The certainty of the confidence (or guarantee) is quantified in the following defi-
nition.
Definition 4.3. (Confidence coefficient) For an interval estimator [L(X),U(X)] of ,

the confidence coefficient of [L(X),U(X)], denoted by (1 ), is the infimum of
the coverage probabilities, that is,
1 = inf P ,

where P := P( [L(X),U(X)]) is the coverage probability of [L(X),U(X)].
Remark 4.1. In many situations, the coverage probability P is free of , and hence
1 = P( [L(X),U(X)]).
Interval estimator, together with a measure of confidence (say, the confidence

coefficient), is sometimes known as confidence interval. So, the terminologies of in-
terval estimators and confidence intervals are interchangeable. A confidence interval
with confidence coefficient equal to 1 , is called a 1 confidence interval.
Example 4.2. Let X1 , , Xn be a random sample from a uniformly distribution over

the interval [0, ], and Y = max Xi . We are interested in an interval estimator of .
1in
We consider two candidate estimators: [aY, bY ] for 1 a < b, and [Y + c,Y + d] for
0 c < d.
For the first interval, we have
( ) ( )
1 Y 1 1 1
P = P ( [aY, bY ]) = P =P T ,
b a b a
where we can show that T has the p.d.f. fT (x) = nxn1 for 0 x 1. Hence, it
follows that
( ) 1/a ( )n ( )n
1 1 1 1
P T = nxn1 dx = .
b a 1/b a b
4.2 Confidence intervals for means 51
( 1 )n ( 1 )n
That is, the coverage probability P of the first interval is free of , and a b
is the confidence coefficient of this interval.
For the second interval, we have
P = P ( [Y + c,Y + d]) = P ( d Y c)
( )
d c
= P 1 T 1

1c/
= nxn1 dx
1d/
( ) ( )
c n d n
= 1 1 .

Hence, we find that the coverage probability P of the second interval is not free of
. Moreover, since ( ) ( )
c n d n
lim 1 1 = 0,

we know that inf P = 0 (i.e., the confidence coefficient of this interval is 0).

Now, the question is how to construct the interval estimator. One important way
to do it is using the pivotal quantity.
Definition 4.4. (Pivotal Quantity) A random variable Q(X, ) = Q(X1 , , Xn , ) is
a pivotal quantity if the distribution of Q(X, ) is free of . That is, regardless of
the distribution of X, Q(X, ) has the same distribution for all values of .
Logically, when Q(X, ) is a pivotal quantity, we can easily construct a 1
confidence interval for Q(X, ) by
( )
1 = P L e Q(X, ) U
e , (4.1)
where Le and U e do not depend on . Suppose that the inequalities L e Q(X, )

e in (4.1) are equivalent to the inequalities L(X) U(X), Then, from (??), a
U
1 confidence interval of is [L(X),U(X)].
In the rest of this section, we will use the pivotal quantity to construct our interval
estimators, and always assume that X = {X1 , , Xn } is an independent random
sample from the population N( , 2 ).
4.2 Confidence intervals for means
4.2.1 One-sample case
We first consider the interval estimator of when 2 is known. Note that

X N( , 2 /n). (4.2)
X
Hence, when 2 is known, Z = N(0, 1) is a pivotal quantity involving .
/ n
Let
( )
1 = P z /2 Z z /2
( )
X
= P z /2 z /2
/ n
( )

= P X z /2 X + z /2 ,
n n
where z satisfies
P(Z z ) =
for Z N(0, 1). Usually, we call z the upper percentile of N(0, 1) at the level ;
see Fig. 4.1. So, when 2 is known, a 1 confidence interval of is
[ ]

X z /2 , X + z /2 . (4.3)
n n
Given the observed value of X = x and the value of z /2 , we can calculate the
area is 1
area is /2 area is /2
z/2 z/2
Fig. 4.1 Upper percentile of N(0, 1) distribution
interval estimate of by
[ ]

x z /2 , x + z /2 .
n n
As the point estimator, the 1 confidence interval is also not unique. Ideally, we
should choose it as narrow as possible in some sense, but in practice, we usually
choose the equal-tail confidence interval as in (4.3) for convenience, since tables for
selecting equal probabilities in the two tails are readily available.
Example 4.3. A publishing company has just published a new college textbook. Be-
fore the company decides the price of the book, it wants to know the average price
of all such textbooks in the market. The research department at the company took
a sample of 36 such textbooks and collected information on their prices. This in-
formation produced a mean price of $48.40 for this sample. It is known that the
standard deviation of the prices of all such textbooks is $4.50. Construct a 90% con-
fidence interval for the mean price of all such college textbooks assuming that the
underlying population is normal.
Solution. From the given information, n = 36, x = 48.40 and = 4.50. Now, 1 =
0.9, i.e., = 0.1, and by (4.3), the 90% confidence interval for the mean price of all
such college textbooks is given by
4.50 4.50
[x z /2 , x + z /2 ] = [48.40 z0.05 , 48.40 + z0.05 ]
n n 36 36
[47.1662, 49.6338].
Example 4.4. Suppose the bureau of the census and statistics of a city wants to esti-
mate the mean family annual income for all families in the city. It is known that
the standard deviation for the family annual income is 60 thousand dollars. How
large a sample should the bureau select so that it can assert with probability 0.99
that the sample mean will differ from by no more than 5 thousand dollars?
Solution. From the construction of a confidence interval, we have

( ) ( )

1 = P z /2 X z /2 = P |X | z /2 ,
n n n
where 1 = 0.99 and = 60 thousand dollars. It suffices to have z /2 n 5 or

( )2 ( )2
60z /2 60 2.576
n = 955.5517.
5 5
Thus, the sample size should be at least 956. (Note that we have to round 955.5517
up to the next higher integer. This is always the case when determining the sample
size.)
Next, we consider the interval estimator of when 2 is unknown. To find a

pivotal quantity, we need to use the following result.
Property 4.1. (i) X and S2 are independent;

( )2
nS2 n Xi X
(ii) 2 = i=1 2 is n1
2 , where 2 is a chi-square distribution with k
k
degrees of freedom;
X
(iii) T = is tn1 , where tk is a t distribution with k degrees of freedom.
S/ n 1
Property 4.2. (i) If Z1 , , Zk are k independent N(0, 1) random variables, then

k
Zi2 is k2 ;
i=1
Z
(ii) If Z is N(0, 1), U is k2 , and Z and U are independent, then T = is tk .
U/k
Proof of Property 4.1. (i) The proof of (i) is out of the scope of this course;
(ii) Note that
( )2 [ ]2
n
Xi n
Xi X X
W= = +
i=1 i=1
( ) 2 n ( )2
n
Xi X X
= +
i=1 i=1
nS2
= + Z2,
2
where we have used the fact that the cross-product term is equal to
n
(X )(Xi X) 2(X ) n ( )
2 = Xi X = 0.
i=1 2 2
i=1
nS2
Note that W is n2 and Z 2 is 12 by Property 4.2(i). Since and Z 2 are independent
2
nS2
by (i), we can show that the m.g.f. of 2 is the same as the one of n1
2 . Hence, (ii)

holds.
(iii) Note that
(X )/( / n)
T= .
nS2 / 2 1/(n 1)
Hence, by Property 4.2(ii), T is tn1 .

From Property 4.1(iii), we know that T is a pivotal quantity of . Let
( )
1 = P t /2,d f =n1 T t /2,d f =n1
( )
X
= P t /2,d f =n1 t /2,d f =n1
S/ n 1
( )
S S
= P X t /2,d f =n1 X + t /2,d f =n1 ,
n1 n1
where t ,d f =k satisfies
P(T t ,d f =k ) =
for a random variable T tk ; see Fig. 4.2. So, when 2 is unknown, a 1 confi-
dence interval of is
[ ]
S S
X t /2,d f =n1 , X + t /2,d f =n1 . (4.4)
n1 n1
Given the observed value of X = x, S = s, and the value of t /2,d f =n1 , we can
area is 1
area is /2 area is /2
t/2,df=n t/2,df=n
Fig. 4.2 Upper percentile of tn distribution
calculate the interval estimate of by

[ ]
s s
x t /2,d f =n1 , x + t /2,d f =n1 .
n1 n1
Remark 4.2. Usually there is a row with degrees of freedom in a t-distribution
table, which actually shows values of z . In fact, when n , the distribution
function of tn tends to that of N(0, 1); see Fig. 4.3. That is, in tests or exams, if
n is so large that the value of t ,d f =n cannot be found, you may use z instead.
t3
t10
t20
N (0, 1)
Fig. 4.3 Distributions of tn and N(0, 1)
Example 4.5. A paint manufacturer wants to determine the average drying time of
a new brand of interior wall paint. If for 12 test areas of equal size he obtained a
mean drying time of 66.3 minutes and a standard deviation of 8.4 minutes, construct
a 95% confidence interval for the true population mean assuming normality.
Solution. As n = 12, x = 66.3, s = 8.4, = 1 0.95 = 0.05 and t /2,d f =n1 =

t0.025,11 2.201, the 95% confidence interval for is
[ ]
8.4 8.4
66.3 2.201 , 66.3 + 2.201 ,
12 1 12 1
that is, [61.1722, 71.4278].

Example 4.6. Construct a 95% confidence interval for the mean hourly wage of ap-
prentice geologists employed by the top 5 oil companies. For a sample of 50 ap-
prentice geologists, x = 14.75 and s = 3.0 (in dollars).
Solution. As n = 50, = 1 0.95 = 0.05, t0.025,d f =49 2.010, we have
s 3.0
t /2,d f =n1 2.010 = 0.8614.
n 50 1
Thus, the 95% confidence interval is [14.75 0.86, 14.75 + 0.86], or [13.89, 15.59].
4.2.2 Tow-sample case
Besides the confidence interval for the mean of one single normal distribution, we
shall also consider the problem of constructing confidence intervals for the differ-
ence of the means of two normal distributions when the variances are unknown.
Let X = {X1 , X2 , , Xn } and Y = {Y1 ,Y2 , ,Ym } be random samples from in-
dependent distributions N(X , X2 ) and N(Y , Y2 ), respectively. We are of interest
to construct the confidence interval for X Y when X2 = Y2 = 2 .
First, we can show that
(X Y ) (X Y )
Z=
2 /n + 2 /m
is N(0, 1). Also, by the independence of X and Y, from Property 4.1(ii), we know
that
nS2 mS2
U = 2X + 2Y

is n+m2
2 . Moreover, by Property 4.1(i), V and U are independent. Hence,
Z
T=
U/(n + m 2)

[(X Y ) (X Y )]/ 2 /n + 2 /m
=
(nSX2 + mSY2 )/[ 2 (n + m 2)]
(X Y ) (X Y )
=
R
is tn+m2 , where ( )
nSX2 + mSY2 1 1
R= + .
n+m2 n m
That is, T is a pivotal quantity of X Y . Let
( )
1 = P t /2,d f =n+m2 T t /2,d f =n+m2
( )
(X Y ) (X Y )
= P t /2,d f =n+m2 t /2,d f =n+m2
R
( )
= P (X Y ) t /2,d f =n+m2 R X Y (X Y ) + t /2,d f =n+m2 R ,
So, when X2 = Y2 = 2 is unknown, a 1 confidence interval of X Y is

[ ]
(X Y ) t /2,d f =n+m2 R, (X Y ) + t /2,d f =n+m2 R . (4.5)
Given the observed value of X = x, Y = y, SX = sX , SY = sY , and the value of

t /2,d f =n+m2 , we can calculate the interval estimate of by
[ ]
(x y) t /2,d f =n+m2 r, (x y) + t /2,d f =n+m2 r .
where ( )
ns2X + msY2 1 1
r= + .
n+m2 n m
Example 4.7. Suppose that scores on a standardized test in mathematics taken by
students from large and small high schools are N(X , 2 ) and N(Y , 2 ), respec-
tively, where 2 is unknown. If a random sample of n = 9 students from large high
schools yielded x = 81.31, s2X = 60.76 and a random sample of m = 15 students
from small high schools yielded y = 78.61, sY2 = 48.24, the endpoints for a 95%
confidence interval for X Y are given by
( )
9 60.76 + 15 48.24 1 1
81.31 78.61 2.074 +
22 9 15
because P(T 2.074) = 0.975. That is, the 95% confidence interval is [3.95, 9.35].
4.3 Confidence intervals for variances
4.3.1 One-sample case
nS2
First, we consider the one-sample case. By Property 4.1(ii), n1
2 is a pivotal
2
quantity involving 2 . Let
( )
nS2
1 = P 12
/2,d f =n1 2
/2,d f =n1
2
( )
nS2 nS2
=P 2
2
,
2 /2,d f =n1 1 /2,d f =n1
where 2 ,d f =n satisfies
P(T 2 ,d f =n ) =
for a random variable T n2 ; see Fig. 4.4. So, a 1 confidence interval of 2 is
4.3 Confidence intervals for variances 59
[ ]
nS2 nS2
, 2 . (4.6)
2 /2,d f =n1 1 /2,d f =n1
Given the observed value of S = s and the values of 2 /2,d f =n1 and 1
2
/2,d f =n1 ,
we can calculate the interval estimate of by
2
[ ]
ns2 ns2
, 2 .
2 /2,d f =n1 1 /2,d f =n1
area is 1
area is
/2
area is /2
21/2,df=n 2/2,df=n
Fig. 4.4 Upper percentile of n2 distribution
Example 4.8. A machine is set up to fill packages of cookies. A recently taken ran-
dom sample of the weights of 25 packages from the production line gave a variance
of 2.9 g2 . Construct a 95% confidence interval for the standard deviation of the
weight of a randomly selected package from the production line.
Solution. As n = 25, s2 = 2.9, = 0.05,
ns2 25(2.9) 25(2.9)

= 1.8420,
2 /2,d f =n1 0.025,d
2
f =24 39.36
ns2 25(2.9) 25(2.9)
= 5.8468,
1
2
/2,d f =n1 0.975,d
2
f =24 12.40
the 95% confidence interval for the population variance is (1.8420, 5.8468). Tak-
ing positive square roots, we obtain the 95% confidence interval for the population
standard deviation to be (1.3572, 2.4180).
4.3.2 Two-sample case
Next, we consider the two-sample case. Let X = {X1 , X2 , , Xn } and Y = {Y1 ,Y2 , ,Ym }
be random samples from independent distributions N(X , X2 ) and N(Y , Y2 ), re-
spectively. We are of interest to construct the confidence interval for X2 /Y2 .
Property 4.3. Suppose that U r21 and V r22 are independent. Then,
U/r1
Fr1 ,r2 =
V /r2
has an Fr1 ,r2 distribution with r1 and r2 degrees of freedom.
By Property 4.1(ii),
nSX2 mSY2
n1
2
and m1
2
.
X2 Y2
Then, by Property 4.3, it follows that

[ ]/[ ]
mSY2 nSX2
Fm1,n1 ,
Y2 (m 1) X2 (n 1)
which is a pivotal quantity involving X2 /Y2 . Let

( [ ]/[ ] )
mSY2 nSX2
1 = P F1 /2,d f =(m1,n1) F /2,d f =(m1,n1)
Y2 (m 1) X2 (n 1)
( )
n(m 1)SX2 X2 n(m 1)SX2
=P F1 /2,d f =(m1,n1) 2 F /2,d f =(m1,n1) ,
m(n 1)SY2 Y m(n 1)SY2
where F ,d f =(m,n) satisfies
P(T F ,d f =(m,n) ) =
for a random variable T Fm,n ; see Fig. 4.5. So, a 1 confidence interval of
X2 /Y2 is
[ ]
n(m 1)SX2 n(m 1)SX2
F1 /2,d f =(m1,n1) , F /2,d f =(m1,n1) . (4.7)
m(n 1)SY2 m(n 1)SY2
4.3 Confidence intervals for variances 61
Given the observed value of SX = sX , SY = sY , and the values of F /2,d f =(m1,n1)

and F1 /2,d f =(m1,n1) , we can calculate the interval estimate of X2 /Y2 by
[ ]
n(m 1)s2X n(m 1)s2X
F1 /2,d f =(m1,n1) , F /2,d f =(m1,n1) .
m(n 1)sY2 m(n 1)sY2
area is 1
area is
/2
area is /2
F1/2,df =(m,n) F/2,df =(m,n)
Fig. 4.5 Upper percentile of Fm,n distribution

Chapter 5
Hypothesis testing
Abstract In scientific activities, much attention is devoted to answering questions

about the validity of theories or hypotheses concerning physical phenomena. For
examples, (i) Is the new drug effective in combating a certain disease? (ii) Are fe-
males more talented in music than males? e.t.c. To answer these questions, we need
use the hypothesis testing, which is a procedure used to determine (make a decision)
whether a hypothesis should be rejected (declared false) or not.
5.1 Basic concepts
To study hypothesis, the following technical terms are needed:

Hypothesis a statement (or claim) about a population;
Hypothesis test a rule that leads to a decision to or not to reject a hypothesis;
Simple hypothesis a hypothesis that completely specifies the distribution of the
population;
Composite hypothesis a hypothesis that does not completely specify the distribu-
tion of the population;
Null hypothesis (H0 ) a hypothesis that is assumed to be true before it can be re-
jected;
Alternative hypothesis (H1 or Ha ) a hypothesis that will be accepted if the null
hypothesis is rejected.
Often, a hypothesis has the special form the unknown distributional parameter
belongs to a set. There may be two competing hypotheses of this form:
H0 : 0 versus H1 : 1 ,
where 0 and 1 are disjoint sets of possible values of the parameter .

Example 5.1. Suppose that the score of STAT2602 follows N( , 10), and we want
to know whether the theoretical mean = 80. In this case,
63
64 5 Hypothesis testing
H0 : = 80 versus H1 : = 80.
Here, H0 is a simple hypothesis, because is the only unknown parameter and 0

consists of exactly one real number; and H1 is a composite hypothesis, because it
can not completely specify the distribution of the score.

If both the two hypotheses are simple, the null hypothesis H0 is usually chosen
to be a kind of default hypothesis, which one tends to believe unless given strong
evidence otherwise.
Example 5.2. Suppose that the score of STAT2602 follows N( , 10), and we want
to know whether the theoretical mean = 80 or 70. In this case,
H0 : = 80 versus H1 : = 70.
Here, both H0 and H1 are simple hypotheses. We tend to believe H0 : = 80 unless

given strong evidence otherwise.
In order to construct a rule to decide whether the hypothesis is rejected or not,

we need to use the test statistic defined by
Test statistic the statistic upon which the statistical decision will be based.
Usually, the test statistic is a functional on the random sample X = {X1 , , Xn }, and
it is denoted by W (X). Some important terms about the test statistic are as follows:
Rejection region or critical region the set of values of the test statistic for which
the null hypothesis is rejected;
Acceptance region the set of values of the test statistic for which the null hypoth-
esis is not rejected (is accepted);
Type I error rejection of the null hypothesis when it is true;
Type II error acceptance of the null hypothesis when it is false.
Accept H0 Reject H0
H0 is true No error Type I error
H0 is false Type II error No error
Suppose that the rejection region is
{W (X) R}.
Let ( ) and ( ) be probabilities of committing a type I and type II error respec-

tively when the true value of the parameter is . That is,
( ) = P (W (X) R) for 0 ;
( ) = P (W (X) Rc ) for 1 .
From ( ) and ( ), we know that

5.1 Basic concepts 65
{
( ), for 0 ;
( ) := P (W (X) R) =
1 ( ), for 1 .
The quantity ( ) is called the power function as follows:

Definition 5.1. (Power function) The power function, ( ), of a test of H0 is the
probability of rejecting H0 when the true value of the parameter is .
Example 5.3. A manufacturer of drugs has to decide whether 90% of all patients
given a new drug will recover from a certain disease. Suppose
(a) the alternative hypothesis is that 60% of all patients given the new drug will
recover;
(b) the test statistic is W , the observed number of recoveries in 20 trials;
(c) he will accept the null hypothesis when T > 14 and reject it otherwise.
Find the power function of W .
Solution: The population is a Bernoulli distribution with parameter p. The hypothe-

ses are
H0 : p = 0.9 versus H1 : p = 0.6.
The test statistic W follows a binomial distribution B(n, p) with parameters n = 20
and p. The rejection region is {W 14}. Hence,
(p) = P p (W 14)
= 1 P p (W > 14)
20 ( )
20 k
= 1 p (1 p)20k
k=15 k
{
0.0113, for p = 0.9;

0.8744, for p = 0.6.
(This implies that the probability of committing a type I and type II error are 0.0113
and 0.1256, respectively.)
Example 5.4. Let X1 , , Xn be a random sample from N( , 2 ), where 2 is
0
known. Consider a test statistic T = X
/ n
for hypotheses H0 : 0 versus H1 :
> 0 . Assume that the rejection region is {T K}. Then, the power function is
( ) = P (T K)
( )
X
= P K+ 0
/ n / n
( )
0
= P Z K+ ,
/ n
where Z N(0, 1). It is easy to see that
lim ( ) = 0, lim ( ) = 1, and (0 ) = if P(Z K) = .

The ideal power function is 0 for 0 and 1 for 1 . However, this ideal
can not be attained in general. For a fixed sample size, it is usually impossible to
make both types of error probability arbitrarily small. In searching for a good test,
it is common to restrict consideration to test that control the type I error probability
at a specified level. Within this class of tests we then search for tests that have type
II error probability that is as small as possible.
The size defined below is used to control the type I error probability.
Definition 5.2. (Size) For [0, 1], a test with power function ( ) is a size test
if
sup ( ) = .
0
Remark 5.1. is also called the level of significance or significance level. If H0 is a

simple hypothesis = 0 , then = (0 ).
Example 5.5. Suppose that we want to test the null hypothesis that the mean of a
normal population with 2 = 1 is 0 against the alternative hypothesis that it is 1 ,
where 1 > 0 .
(a) Find the value of K such that {X K} provides a rejection region with the level
of significance = 0.05 for a random sample of size n.
(b) For the rejection region found in (a), if 0 = 10, 1 = 11 and we need the type
II probability 0.06, what should n be?
Solution. (a) Note that H0 : = 0 , H1 : = 1 , and the rejection region is {X K}.

By definition,
= (0 ) = P0 (X K)
( )
X 0 K 0
= P 0
/ n / n
( )
K 0
=P Z ,
1/ n
where Z N(0, 1). Hence, when = 0.05, we should have

( )
K 0
0.05 = P Z ,
1/ n
which is equivalent to
K 0 1.645
= z0.05 1.645 or K 0 + .
1/ n n
(b) Note that H0 : = 10, H1 : = 11, and the rejection region is {X K}. By
definition,
5.1 Basic concepts 67
= (1 ) = P1 (X < K)
( )
X 1 K 1
= P 1 <
/ n / n
( )
K 1
=P Z<
/ n
( )
0 + 1.645
1
n
P Z< .
/ n
With 0 = 10, 1 = 11, 2 = 1, it follows that

( ) ( )
P Z < n(0 1 ) + 1.645 = P Z < n + 1.645 .
Hence,

0.06 n + 1.645 z0.06 1.555
n (1.645 + 1.555)2 10.24,
that is, n 11.

Remark 5.2. In the above example, the value of K in the rejection region {X K}
is determined by the significance level . For the test statistic X, the value of K
uniquely decides whether the null hypothesis is rejected or not, and it is usually
called a critical value of this test.
In summary, steps to perform a hypothesis test are as follows:

(1) State the null and alternative hypotheses and the level of significance .
(2) Choose a test statistic.
(3) Determine the rejection region.
(4) Calculate the value of the test statistic according to the particular sample drawn.
(5) Make a decision: reject H0 if and only if the value of the test statistic falls in the
rejection region.
The key steps are (2) and (3), and they can be accomplished by using the like-
lihood ratio or generalized likelihood ratio. The test statistic, denoted by W (X),
is chosen case by case. The rejection region of W (X) usually has the form of
{W (X) K}, {W (X) K}, {|W (X)| K}, or {W (X) K1 } {W (X) K2 },
where the values of K, K1 and K2 are determined by the significance level .
Instead of using step (5), we can also use p-value to make a decision.
Definition 5.3. (p-value) Let W (x) be the observed value of the test statistic W (X).
Case 1: The rejection region is {W (X) K}, then
p-value = sup P (W (X) W (x));

0
Case 2: The rejection region is {W (X) K}, then

p-value = sup P (W (X) W (x));

0
Case 3: The rejection region is {|W (X)| K}, then
p-value = sup P (|W (X)| |W (x)|).

0
Roughly speaking, p-value is the probability of obtaining a result equal to or

more extreme than (in the direction supporting the alternative hypothesis) what
was actually observed, when the null hypothesis is true.
From the above example, we know that p-value does not depend on , and it
helps us to make a decision by comparing its value with .
Property 5.1. For a test statistic W (X),
H0 is rejected at the significance level p-value .
Proof. We only prove it for Case 1. Note that
p-value = sup P (W (X) W (x)) and = sup P (W (X) K).

0 0
By the monotonicity of the c.d.f., we have
p-value W (x) K
the observed value of W (X) falls in the rejection region
H0 is rejected at the significance level .
Example 5.3. (cont) If the observed value of W is 12, then
p-value = P p (W 12) for p = 0.9

12 ( )
20
= (0.9)k (0.1)20k 0.0004.
k=0 k
Hence, at the significance level = 0.05, the null hypothesis is rejected.

Example 5.4. (cont) If the observed value of X is 10.417, then
p-value = P (X 10.417) for = 10

( )
X 10.417
= P for = 10
/ n / n
( )
10.417 10
=P Z
1/ 11
0.0833.
5.2 Most powerful tests 69
Hence, at the significance level = 0.05, the null hypothesis H0 : = 10 is not

rejected.
5.2 Most powerful tests
Definition 5.4. (Most powerful tests) A test concerning a simple null hypothesis
= 0 against a simple alternative hypothesis = 1 is said to be most powerful if
the power of the test at = 1 is a maximum.
To construct a most powerful rejection region we refer to the likelihood function

of a random sample X = {X1 , X2 , , Xn } defined by
L( ) = f (X1 , X2 , . . . , Xn ; ),
where f (x1 , x2 , . . . , xn ; ) is the joint p.d.f. of the random variables X1 , X2 , . . . , Xn

L(0 )
from a population with a parameter . Consider the likelihood ratio . Intu-
L(1 )
itively speaking, the null hypothesis should be rejected when the likelihood ratio is
small.
Theorem 5.1. (Neyman-Pearson Lemma) Suppose X1 , X2 , . . . , Xn constitute a ran-

dom sample of size n from a population with exactly one unknown parameter .
Suppose that there is a positive constant k and a region C such that
P {(X1 , X2 , . . . , Xn ) C} = for = 0 ,
and
f (x1 , x2 , . . . , xn ; 0 )
k when (x1 , x2 , . . . , xn ) C,
f (x1 , x2 , . . . , xn ; 1 )
f (x1 , x2 , . . . , xn ; 0 )
k when (x1 , x2 , . . . , xn ) C,
f (x1 , x2 , . . . , xn ; 1 )
Construct a test, called the likelihood ratio test, which rejects H0 : = 0 and
accepts H1 : = 1 if and only if (X1 , X2 , . . . , Xn ) C. Then any other test which
has significance level has power not more than that of this likelihood ratio
test. In other words, the likelihood ratio test is most powerful among all tests having
significance level .
Proof. Suppose D is the rejection region of any other test which has significance
level . We consider first the continuous case. Note that
= P {(X1 , X2 , . . . , Xn ) C} for = 0

= f (x1 , x2 , . . . , xn ; 0 )dx1 dx2 dxn ;
C
= P {(X1 , X2 , . . . , Xn ) D} for = 0

= f (x1 , x2 , . . . , xn ; 0 )dx1 dx2 dxn .
D
Since , it follows that

f (x1 , x2 , . . . , xn ; 0 )dx1 dx2 dxn
C

f (x1 , x2 , . . . , xn ; 0 )dx1 dx2 dxn .
D
Subtracting
f (x1 , x2 , . . . , xn ; 0 )dx1 dx2 dxn ,
CD
we get

f (x1 , x2 , . . . , xn ; 0 )dx1 dx2 dxn
CD

f (x1 , x2 , . . . , xn ; 0 )dx1 dx2 dxn ,
C D
where C and D are complements of C and D respectively. Hence,

f (x1 , x2 , . . . , xn ; 1 )dx1 dx2 dxn
CD

f (x1 , x2 , . . . , xn ; 0 )
dx1 dx2 dxn
k
CD

f (x1 , x2 , . . . , xn ; 0 )
dx1 dx2 dxn
k
C D

f (x1 , x2 , . . . , xn ; 1 )dx1 dx2 dxn .
C D

Adding f (x1 , x2 , . . . , xn ; 1 )dx1 dx2 dxn , we finally obtain
CD

f (x1 , x2 , . . . , xn ; 1 )dx1 dx2 dxn
C

f (x1 , x2 , . . . , xn ; 1 )dx1 dx2 dxn ,
D
5.2 Most powerful tests 71
or
P {(X1 , X2 , . . . , Xn ) C} P {(X1 , X2 , . . . , Xn ) D}
for = 1 . The last inequality states that the power of the likelihood ratio test at
= 1 is at least as much as that corresponding to the rejection region D. The proof
for discrete case is similar, with sums taking places of integrals.
Neyman-Pearson Lemma says that to test H0 : = 0 versus H1 : = 1 , the

rejection region for the likelihood ratio test is
L(0 )
k (X1 , X2 , , Xn ) C W (X) R,
L(1 )
where the interval R is chosen so that the test has the significance level . Generally
speaking, the likelihood ratio helps us to determine the test statistic and the form of
its rejection region.
Example 5.6. A random sample {X1 , X2 , . . . , Xn } from a normal population N( , 2 ),

where 2 = 02 is known, is to be used to test the null hypothesis = 0 against the
alternative hypothesis = 1 , where 1 > 0 . Use the Neyman-Pearson Lemma to
construct the most powerful test.
Solution. The likelihood function of the sample is

( )n [ ]
1 1 n
L( ) = exp 2 (Xi ) .
2
0 2 20 i=1
L(0 )
The likelihood ratio test rejects the null hypothesis = 0 if and only if k,
L(1 )
that is,
{ }
1 n [ ]
exp (Xi 1 ) (Xi 0 ) k
202 i=1
2 2
n
(21 Xi + 12 + 20 Xi 02 ) 202 ln k
i=1
n
n(12 02 ) + 2(0 1 ) Xi 202 ln k
i=1
20 ln k n(1 0 )
2 2 2
X (since 1 > 0 ).
2n(0 1 )
Therefore, in order that the level of significance is , we should choose a constant

K such that P (X K) = for = 0 , that is,
( )
X 0 K 0 K 0 0 z
P = = z K = 0 + .
0 / n 0 / n 0 / n n
Therefore, the most powerful test having significance level is the one which
has the rejection region
{ } { }
0 z X 0
X 0 + or z .
n 0 / n
(Note that the rejection region found does not depend on the value of 1 ).

Example 5.7. Suppose X1 , X2 , . . . , Xn constitute a random sample of size n from a

population given by a density
f (x) = x 1 I(0 x 1).
If 0 Xi 1 for i = 1, 2, . . . , n, find the form of the most powerful test with signifi-
cance level for testing
H0 : = 2 versus H1 : = 1.
Solution. The likelihood function of the sample is

( ) 1 ( ) 1
n n n
L( ) = n
Xi I(0 Xi 1) = Xi
n
.
i=1 i=1 i=1
Hence, the likelihood ratio is

n
L(2)
= 2n Xi .
L(1) i=1
n
The likelihood ratio test rejects H0 if and only if 2n Xi K where K is a positive
i=1
n
constant (or, equivalently, Xi k where k is a positive constant).

i=1
5.3 Generalized likelihood ratio tests: One-sample case
The Neyman-Pearson lemma provides a method of constructing most powerful re-

jection regions for testing a simple null hypothesis against a simple alternative hy-
pothesis, but it does not always apply to composite hypotheses. We shall present a
general method for constructing rejection regions for tests of composite hypotheses
which in most cases have very satisfactory properties, although they are not neces-
sarily uniformly most powerful.
Suppose that , where is the parametric space. Consider the following
hypotheses:
5.3 Generalized likelihood ratio tests: One-sample case 73
H0 : 0 versus H1 : 1 ,
where 1 is the complement of 0 with respect to (i.e., 1 = /0 ). Let
L(0 ) = max L( ) and L( ) = max L( ),

0
where L( ) = L(X1 , , Xn ; ) is the likelihood function of X1 , , Xn .

The generalized likelihood ratio is defined as
L(0 )
= .
L( )
Since 0 is a subset of , it follows that 1. When the null hypothesis is false,

we would expect to be small. A generalized likelihood ratio test states, therefore,
that the null hypothesis H0 is rejected if and only if falls in a rejection region of
the form k, where 0 k 1.
5.3.1 Testing for the mean: Variance known
Example 5.8. Find the generalized likelihood ratio test for testing
H0 : = 0 versus H1 : = 0
on the basis of a random sample of size n from N( , 2 ), where 2 = 02 is known.
Solution. is the set of all real numbers (i.e., = R) and 0 = {0 }. On one

hand, since 0 contains only 0 , it follows that
( )n [ ]
1 1 n
L(0 ) = exp 2 (Xi 0 ) .
2
0 2 20 i=1
On the other hand, since the maximum likelihood estimator of is X, it follows

that ( )n [ ]
1 1 n
L( ) = exp 2 (Xi X)2 .
0 2 20 i=1
Hence,
L(0 )
=
L( )
{ [ ]}
n n
1
= exp 2 (Xi 0 ) (Xi X)
2 2
20 i=1 i=1
[ ]
n(X 0 ) 2
= exp .
202
{ }
Therefore, the rejection region is X 0 K . In order that the level of signifi-
cance is , that is, ( )
P X 0 K = for = 0 ,
0
we should let K = z /2 n
, so that
( )
( ) 0
P X 0 K = P X 0 z /2
n
( ) ( )
X 0 X 0
= P z /2 + P z /2
0 / n 0 / n
( ) ( )
= P Z z /2 + P Z z /2

= + =
2 2
for = 0 . So, the generalized likelihood ratio test has the rejection region
{ }
X 0
z /2
0 / n
at the significance level .

From aforemention example and the similar technique, we can have the following
table:
Test H0 H1
Rejection region p-value
)
{ } (
X 0 x 0
Two-tailed = 0
= 0 z /2 P |Z|

{ / n } ( / n)
X 0 x 0
Left-tailed = 0 or 0 < 0 z P Z
{ / n } ( / n)
X 0 x 0
Right-tailed = 0 or 0 > 0 z P Z
/ n / n
Example 5.9. The standard deviation of the annual incomes of government employ-
ees is $1400. The mean is claimed to be $35,000. Now a sample of 49 employees
has been drawn and their average income is $35,600. At the 5% significance level,
can you conclude that the mean annual income of all government employees is not
$35,000?
Solution 1.
Step 1: The mean ... is not 35,000 can be written as = 35000, while the
mean ... is 35,000 can be written as = 35000. Since the null hypothesis should
include an equality, we consider hypothesis:
H0 : = 35000 versus H1 : = 35000.

Step 2: The test statistic is
X 0 X 35000 X 35000
Z= = = ,
/ n 1400/ 49 200
which follows N(0, 1) under H0 .

Step 3: At the significance level = 5%, the rejection region is
{ }
|Z| z /2 {|Z| 1.960} .
Step 4: Since x = 35600, the value of the test statistic is

35600 35000
= 3.
200
Step 5: Since |3| 1.960, we reject H0 and accept H1 . Therefore, we conclude
that the mean annual income of all government employees is not $35,000 at the 5%
level of significance.
Solution 2.
Step 1:
H0 : = 35000 versus H1 : = 35000.
Step 2: The test statistic is
X 0 X 35000 X 35000
Z= = = ,
/ n 1400/ 49 200
which follows N(0, 1) under H0 .

Step 3: Since x = 35600, the value of the test statistic is
35600 35000
= 3.
200
Step 4:
p-value = P (|Z| |3|) = 2P (Z 3) 2(0.5 0.4987) = 0.0026,
where Z follows N(0, 1).

Step 5: Since 0.0026 0.05 = , we reject H0 and accept H1 . Therefore we
conclude that the mean annual income of all government employees is not $35,000.
Example 5.10. The chief financial officer in FedEx believes that including a stamped
self-addressed envelope in the monthly invoice sent to customers will reduce the
amount of time it takes for customers to pay their monthly bills. Currently, cus-
tomers return their payments in 24 days on average, with a standard deviation of 6
days. It was calculated that an improvement of two days on average would cover the
costs of the envelopes (because cheques can be deposited earlier). A random sample
of 220 customers was selected and stamped self-addressed envelopes were included
in their invoice packs. The amounts of time taken for these customers to pay their
bills were recorded and their mean is 21.63 days. Assume that the corresponding
population standard deviation is still 6 days. Can the chief financial officer conclude
that the plan will be profitable at the 10% significance level?
Solution 1. The plan will be profitable when < 22, and not profitable when
22. Since the null hypothesis should include an equality, we have
H0 : 22 versus H1 : < 22.
The value of the test statistic is

x 0 21.63 22
= 0.9147.
/ n 6/ 220
Since 0.9147 > 1.282 z0.1 , H0 should not be rejected. The chief financial
officer cannot conclude that the plan is profitable at the 10% significance level.
Solution 2: Consider
p-value P(Z 0.9147) 0.1814 > 0.1 = ,
where Z follows N(0, 1). Therefore, H0 should not be rejected. The chief financial
officer cannot conclude that the plan is profitable at the 10% significance level.

5.3.2 Testing for the mean: Variance unknown
Example 5.11. Find the generalized likelihood ratio test for testing
H0 : = 0 versus H1 : > 0
on the basis of a random sample of size n from N( , 2 ).
Solution. Now
= {( , ) : 0 , > 0} ,
0 = {( , ) : = 0 , > 0} ,
1 = {( , ) : > 0 , > 0} .
The likelihood function of the sample is

( )n [ ]
1 1 n
L( , ) = = exp 2 (Xi ) ,
2
2 2 i=1
and hence,
ln L( , ) n
= 2 (X ),

ln L( , ) n 1 n
= + 3 (Xi )2 .
i=1
On 0 , the maximum value of L( , ) is L(0 , ), where satisfies
1 n
2 = (Xi 0 )2 .
n i=1
This is because is the maximum value of ln L(0 , ), by noting that for all > 0,

1 n ln L( , )
< (Xi )2 > 0,
n i=1

1 n ln L( , )
>
n i=1
(Xi )2

< 0.
Therefore, ( )n
1 ( n)
L(0 ) = L(0 , ) = exp .
2 2
On , the maximum value of L( , ) is L( , ), where (noting that L( , )
decreases with respect to when > X and increases with respect to when
< X) {
0 , if X 0 ;
=
X, if X > 0 ,
and
1 n
2 = (Xi )2 .
n i=1
Therefore, ( )n
1 ( n)
L( ) = L( , ) = exp .
2 2
Thus, we have

1, if X 0 ;

n n/2
( )n ( 2 )n/2

L(0 ) (Xi X)
2
= = = =
L( ) 2
i=1 , if X > 0 .

n

(Xi 0 )2
i=1
The rejection region is { k} for some

{ nonnegative
} constant k < 1 (since we do
not want to be 1). Then { k} X > 0 and k is equivalent to
n n
(Xi X)2 (Xi X)2 1
i=1 i=1
k2/n n = n = ,
n(X0 )2
(Xi 0 )2 (Xi X)2 + n(X 0 )2 1+ n
i=1 i=1 (Xi X)2
i=1
that is,
(X 0 )2 n(X 0 )2
= n k2/n 1,
S2
(Xi X) 2
i=1
or (since X > 0 )
X 0
c,
S/ n 1

where c is the constant (n 1)(k2/n 1). In order that the level of significance
is , that is, ( )
X 0
P( , ) c = for = 0 ,
S/ n 1
we should let c = t ,n1 , since
( )
X 0
P( , ) t ,n1 = P (tn1 t ,n1 ) for = 0
S/ n 1
by Property 4.1(iii). So, the generalized likelihood ratio test has the rejection region
{ }
X 0
t ,n1
S/ n 1
at the significance level .

Example 5.12. What will happen if we change H0 in the previous example to be

0 ?
Solution. Note that
= {( , ) : < < , > 0} ,

0 = {( , ) : 0 , > 0} ,
1 = {( , ) : > 0 , > 0} .
On 0 , the maximum value of L( , ) is L( , ) where

{
X, if X < 0 ;
=
0 , if X 0 ,
and
1 n
2 = (Xi )2 .
n i=1
Therefore, ( )n
1 ( n)
L(0 ) = L( , ) = exp .
2 2
On , the maximum value of L( , ) is L( , ), where
1 n
= X and 2 = (Xi X)2
n i=1
Therefore, ( )n
1 ( n)
L( ) = L( , ) = exp .
2
2
Thus, we have

1, if X 0 ;

n n/2

( )n ( 2 )n/2
=
L(0 )
=

=

=

(Xi X)2
L( ) 2
ni=1
, if X > 0 .

(Xi 0 )2

i=1
Hence the generalized likelihood ratio remains the same as that in the previous ex-
ample, and so does the rejection region.
From aforemention two examples and the similar technique, we can have the
following table:
Test H0 H1 Rejection
region } p-value
)
{ (
X 0 x 0
Two-tailed = 0 = 0 t /2,n1
P |tn1 |
{ S/ n 1 } ( s/ n 1)
X 0 x 0
Left-tailed = 0 or 0 < 0 t ,n1 P tn1
{S/ n 1 } ( s/ n 1 )
X 0 x 0
Right-tailed = 0 or 0 > 0 t ,n1 P tn1
S/ n 1 s/ n 1
Example 5.13. According to the last census in a city, the mean family annual in-
come was 316 thousand dollars. A random sample of 900 families taken this year
produced a mean family annual income of 313 thousand dollars and a standard de-
viation of 70 thousand dollars. At the 2.5% significance level, can we conclude that
the mean family annual income has declined since the last census?
Solution. Consider hypothesis
H0 : 316 versus H1 : < 316.
The value of the test statistic is

x 0 313 316
= 1.286.
s/ n 1 70/ 900 1
Since 1.286 > 1.963 = t0.025,899 , we do not reject H0 . Thus we cannot conclude
that the mean family annual income has declined since the last census at the 2.5%
level of significance.

5.3.3 Testing for the variance
Example 5.14. Given a random sample of size n from a normal population with
unknown mean and variance, find the generalized likelihood ratio test for testing the
null hypothesis = 0 (0 > 0) against the alternative hypothesis = 0 .
Solution. Note that
= {( , ) : < < , > 0} ,

0 = {( , ) : < < , = 0 } ,
1 = {( , ) : < < , > 0, = 0 } ,
and the likelihood function of the sample {X1 , , Xn } is

( )n [ ]
1 1 n
L( , ) = exp 2 (Xi ) . 2
2 2 i=1
On 0 , the maximum value of L( , ) is L( , 0 ) where = X. Therefore,
L(0 ) = L( , 0 )
( )n [ ]
1 1 n
= exp 2 (Xi X)2 .
0 2 20 i=1
On , the maximum value of L( , ) is L( , ) where
1 n
= X and 2 = (Xi X)2
n i=1
Therefore, ( )n
1 ( n)
L( ) = L( , ) = exp .
2 2
Thus, we have
n
L(0 )
(
2
)n/2 (Xi X)2
n

= = exp i=1 +
L( ) 02 202 2
n n/2 n
i i
(X X)2 (X X)2
n
i=1
= i=1 exp + .
n02 202 2
The rejection region is { k} for some positive constant k < 1 (since we do

1 n
not want to be 1). Letting Y = (Xi X)2 ,
n02 i=1
( )
nY n
k Y n/2 exp + k,
2 2
Y exp(Y + 1) k2/n ,
k2/n
Y exp(Y ) .
e
For y > 0 define a function g(y) = yey . Then,
dg(y)
= ey yey = (1 y)ey .
dy
Since
dg(y)
y < 1 >0
dy
and
dg(y)
y > 1 < 0,
dy
g(y) will be small when y is close to zero or very large. Thus we reject the null
hypothesis = 0 when the value of Y (or nY ) is large or small, that is, the rejection
region of our generalized likelihood ratio test has the rejection region:
{nY K1 } {nY K2 }.
nS2
Note that nY = . In order that the level of significance is , that is,
02
( ) ( 2 )
nS2 nS
P( , ) K1 + P K2 = for = 0 ,
02 02
we should let K1 = 1
2
/2,n1 and K2 = /2,n1 , since
2
( ) ( )
nS2
P( , ) K1 = P n1
2
1
2
/2,n1 =
02 2
and ( ) ( )
nS2
P( , ) K2 = P n1
2
2 /2,n1 =
02 2
for = 0 by using the fact that nY n1
2 from Property 4.1(ii).

From the aforemention example and the similar technique, we can have the fol-
lowing table:
Test H0 H1
Rejection region p-value
{ } ( ( )
nS2 ns2
Two-tailed = 0 = 0 1 /2,n1 2 min P n1 2 ,
2 2
02
{ } ( )0
nS2 ns2 )
/2,n1
2
P n1 2
2
{ 20 0 )
2
} (
nS ns2
Left-tailed = 0 or 0 < 0 2
1 ,n1 P 2
n1
{0 2 02 )
2
} (
nS ns2
Right-tailed = 0 or 0 > 0 2 ,n1 P n12
2
0 2 0
Example 5.15. One important factor in inventory control is the variance of the daily
demand for the product. A manager has developed the optimal order quantity and
reorder point, assuming that the variance is equal to 250. Recently, the company
has experienced some inventory problems, which induced the operations manager
to doubt the assumption. To examine the problem, the manager took a sample of 25
daily demands and found that s2 = 270.58. Do these data provide sufficient evidence
at the 5% significance level to infer that the management scientists assumption
about the variance is wrong?
Solution. Consider hypothesis
H0 : 2 = 250 vesus H1 : 2 = 250.
The value of test statistic is

5.4 Generalized likelihood ratio tests: Two-sample case 83
ns2 25 270.58
= 25.976.
02 250
Since 10.05/2,251
2 12.401 25.976 39.364 0.05/2,251
2 , we do not reject
H0 . There is not sufficient evidence at the 5% significance level to infer that the
management scientists assumption about the variance is wrong.
5.3.4 Test and interval estimation
We can obtain the interval estimation by using the two-tailed hypothesis testing. For
example, consider hypotheses
H0 : = 0 versus = 0 .
If the variance is known, the accept region is

{ }
X 0
< z /2 X z /2 < 0 < X + z /2 .
/ n n n
at the significance level . As H0 is accepted, = 0 hence

( )

P X z /2 < < X + z /2 = 1 .
n n
[ ]
That is, X z /2 n , X + z /2 n is the 1 confidence interval of .
Similarly, we can find the confidence interval of when the variance is unknown,
and 2 by using the two-tailed hypothesis testing.
5.4 Generalized likelihood ratio tests: Two-sample case
In this section, we assume that there are two populations following N(1 , 12 ) and
N(2 , 22 ) respectively. A sample {Xi , i = 1, 2, . . . , n1 } is taken from the popula-
tion N(1 , 12 ) and a sample {Y j , j = 1, 2, . . . , n2 } is taken from the population
N(2 , 22 ). Assume that these two samples are independent (that is, X1 , X2 , . . . , Xn1 ,
Y1 ,Y2 , . . . ,Yn2 are independent).
5.4.1 Testing for the mean: Variance is known
We first consider the hypothesis testing for 1 2 when 1 and 2 are known.
Example 5.16. Assume that 1 and 2 are known. Find the generalized likelihood
ratio for testing
H0 : 1 2 = versus H1 : 1 2 = .
Solution. Note that
0 = {(1 , 2 ) : 1 2 = } ,
1 = {(1 , 2 ) : 1 2 = } ,
= 0 1 = {(1 , 2 ) : < 1 < , < 2 < } .
The likelihood function of the two samples is

( )n1 [ ]
1 1 n1
L(1 , 2 ) = exp 2 (Xi 1 )2
1 2 21 i=1
( )n2 [ ]
1 1 n2
exp 2 (Y j 2 )2 .
2 2 22 j=1
On 0 , we have
ln L(1 , 2 ) = ln L(1 , 1 )
1 n1 1 n2
= C
21 i=1
2
(Xi 1 )2 2
22
(Y j 1 + )2 ,
j=1
where C depends on neither 1 nor 2 . By direct calculation,
1 n1 1 n2
ln L(1 , 1 ) = 2 (Xi 1 ) + 2 (Y j 1 + )
1 1 i=1 2 j=1
n1 (X 1 ) n2 (Y 1 + )
= +
12 22
( )
n1 X n2 (Y + ) n1 n2
= 2 + + 1 .
1 22 12 22
Therefore, the maximum likelihood estimator of 1 is
n1 X n2 (Y + )
+
12 22
1 = n1 n2 ,
+
12 22
since

1 < 1 ln L(1 , 1 ) > 0,
1

1 > 1 ln L(1 , 1 ) < 0.
1
On , it is easy to see that the maximum likelihood estimator of 1 is X and that

of 2 is Y , since 1 = X maximizes
( )n1 [ ]
1 1 n1
exp 2 (Xi 1 )2 ,
1 2 21 i=1
and 2 = Y maximizes
( )n2 [ ]
n2
1 1

2 2
exp 2
22
(Y j 2 )
2
.
j=1
Thus, the generalized likelihood ratio is
L(0 )
=
L( )
[ ]
1 n1 [ ] 1 [
n2 ]
= exp 2 (Xi 1 )2 (Xi X)2 2 (Y j 1 + ) (Y j Y )
2 2
21 i=1 22 j=1
[ ]
n1 (X 1 )2 n2 (Y 1 + )2
= exp
212 222
[ ]
= exp C (X Y )2 ,
where C is negative and does not depend on the samples, because

n2
(X Y )
2
X 1 = 2 n1 n2 ,
+
12 22
n1
(Y + X)
12
Y 1 + = n1 n2 .
+ 2
1 2
2
{ }
Therefore the rejection region should be |X Y | K .
Under H0 , we have
( 2)
X follows N 1 , 1 ,
( n1
)
Y follows N 1 , 22 ,
n2
and thus (by the independence between the two samples)

( )
2 2
X Y follows N , 1 + 2 .
n1 n2
Therefore, the rejection region is

|X Y |
z /2 ,

12 22

+
n1 n2
X Y
where the test statistic is .

12 22
+
n1 n2
lowing table:
Test H0 H1 Rejection region

p-value

X Y

x y
1 2 = 1 2 =
Two-tailed
z /2 P |Z| 2
2

2
2
n1 + n2 n11 + n22
1 2

X Y xy
Left-tailed 1 2 = 1 2 < z P Z

1 + 2 12 22
2 2
n1 n2 n1+ n2
or 1 2

X Y xy
Right-tailed 1 2 = 1 2 > z P
Z 2

1 + 2 1 22
2 2
n1 n2 n1 + n2
or 1 2
5.4.2 Testing for the mean: Variance is unknown
We second consider the hypothesis testing for 1 2 when 1 and 2 are unknown
but equal.
Example 5.17. Assume that 1 and 2 are unknown but equal to . Find the gener-
alized likelihood ratio for testing
H0 : 1 2 = versus H1 : 1 2 = .
Solution. Note that
0 = {(1 , 2 , ) : 1 2 = , > 0} ,
1 = {(1 , 2 , ) : 1 2 = , > 0} ,
= 0 1 = {(1 , 2 , ) : > 0} .
The likelihood function of the two samples is

( )n1 +n2 { [ ]}
n1 n2
1 1
L(1 , 2 , ) = exp 2 (Xi 1 ) + (Y j 2 )
2 2
.
2 2 i=1 j=1
On 0 , we have
ln L(1 , 2 , ) = ln L(1 , 1 , )
[ ]
n1 n2
1
= C (n1 + n2 ) ln 2
2 (Xi 1 ) 2
+ (Y j 1 + )
2
,
i=1 j=1
where C is a constant. Then,
n1 (X 1 ) + n2 (Y 1 + )
ln L(1 , 1 , ) =
1 2
n1 X + n2 (Y + ) n1 + n2
= 1 .
2 2
This implies that the maximum likelihood estimator of 1 is
n1 X + n2 (Y + )
1 = ,
n1 + n2
which does not depend on , since

1 < 1 ln L(1 , 1 , ) > 0,
1

1 > 1 ln L(1 , 1 , ) < 0.
1
Therefore, it is now sufficient to consider L( 1 , 1 , ) for finding the maximum

likelihood estimator of . By direct calculation,
[ ]
n1 + n2 1 n1 n2
ln L( 1 , 1 , ) = + 3 (Xi 1 ) + (Y j 1 + )
2 2
i=1 j=1
[ ]
n1 n2
1
= 3 (n1 + n2 ) + (Xi 1 ) + (Y j 1 + )
2 2 2
i=1 j=1
and the maximum likelihood estimator of is

v [ ]
u
u 1 n1 n2
t
= (Xi 1 ) + (Y j 1 + ) ,
n1 + n2 i=1
2 2
j=1
since

> ln L( 1 , 1 , ) < 0.

Therefore,
n1 + n2
ln L(0 ) = C (n1 + n2 ) ln .
2
On , we have
[ ]
n1 n2
1
ln L(1 , 2 , ) = C (n1 + n2 ) ln 2
2 (Xi 1 ) 2
+ (Y j 2 ) 2
,
i=1 j=1
where C is a constant. Then, by direct calculation,
n1 (X 1 )
ln L(1 , 2 , ) = ,
1 2
n2 (Y 2 )
ln L(1 , 2 , ) = ,
2 2
[ ]
n1 + n2 1 n1 n2

ln L(1 , 2 , ) =

+ 3
(Xi 1 )2 + (Y j 2 )2 .
i=1 j=1
Hence, by following the same routine as before, we can show that the maximum
likelihood estimators are
1 = X,
2 = Y ,
[ ]
n1 n2
1
=
2
n1 + n2 (Xi X) 2
+ (Y j Y ) 2
.
i=1 j=1
Therefore,
n1 + n2
ln L( ) = C (n1 + n2 ) ln .
2
Now, the generalized likelihood ratio is

( )(n1 +n2 )/2
L(0 ) (n1 +n2 ) 2
= = (n +n ) = .
L( ) 1 2 2
Note that
n1 n2
(Xi 1 )2 + (Y j 1 + )2
2 i=1 j=1
=
2 n1 n2
(Xi X)2 + (Y j Y )2
i=1 j=1
n1 n2
(Xi X)2 + n1 (X 1 )2 + (Y j Y )2 + n2 (Y 1 + )2
i=1 j=1
= n1 n2
(Xi X)2 + (Y j Y )2
i=1 j=1
n1 (X 1 )2 + n2 (Y 1 + )2
= 1+ n1 n2
(Xi X)2 + (Y j Y )2
i=1 j=1
[ ]2 [ ]2
n2 (X Y ) n1 (Y + X)
n1 + n2
n1 + n2 n1 + n2
= 1+ n1 n2
(Xi X)2 + (Y j Y )2
i=1 j=1
n1 n2
(X Y )2
n1 + n2
= 1+
n1 S12 + n2 S22
(X Y )2
= 1+ ( ) ,
1 1 [ 2 2
]
+ n1 S1 + n2 S2
n1 n2
{ }
where S12 and S22 are the sample variances of {Xi , i = 1, 2, . . . , n1 } and Y j , j = 1, 2, . . . , n2
respectively, Therefore H0 should be rejected when
|X Y |

1 2
is large.
1 2
+ n1 S1 + n2 S2
n1 n2
( ) ( )
2 2
Under H0 , X follows N 1 , and Y follows N 1 , , and thus
( ) n1 n2
2 2
X Y follows N , + , which implies that
n1 n2
X Y
follows N(0, 1).
1 1
+
n1 n2
n1 S12 n2 S22
Besides, the fact that the two independent random variables and follows
2 2
n1 S12 + n2 S22
n21 1 and n22 1 respectively implies that follows n21 +n2 2 . Therefore,
2
X Y

n11 + n12 X Y
W= / =
n1 S12 + n2 S22 1 1 n1 S12 + n2 S22
(n1 + n2 2) +
2 n1 n2 n1 + n2 2
follows tn1 +n2 2 by Property 4.2(ii). Letting

n1 n2
(Xi X)2 + (Y j Y )2
n1 S12 + n2 S22 i=1 j=1
S2p = = ,
n1 + n2 2 n1 + n2 2
{ } X Y
then the rejection region is |W | t /2,n1 +n2 2 , where the test statistic is W = .
1 1
Sp +
n1 n2
lowing table:
Test H0 H1 Rejection
region p-value

X Y
xy

Two-tailed 1 2 = 1 2 = t /2,n +n 2 P |tn +n 2 |
S 1
1 2 1 2
p
1
n1 + n2
s p n1 + n1
1 2
X Y xy
Left-tailed 1 2 = 1 2 < t ,n1 +n2 2 P tn1 +n2 2
S 1
+ 1 s 1
+ 1
p n1 n2 p n1 n2
or 1 2
X Y x y
Right-tailed 1 2 = 1 2 > t ,n1 +n2 2 P tn1 +n2 2
S 1
+ 1 s p n11 + n12
p n1 n2
or 1 2
Remark 5.3. S p is called the pooled sample variance, which is an unbiased estimator
of 2 .
Example 5.18. A consumer agency wanted to estimate the difference in the mean
amounts of caffeine in two brands of coffee. The agency took a sample of 15 500-
gramme jars of Brand I coffee that showed the mean amount of caffeine in these
jars to be 80 mg per jar and the standard deviation to be 5 mg. Another sample of
12 500-gramme jars of Brand II coffee gave a mean amount of caffeine equal to
77 mg per jar and a standard deviation of 6 mg. Assuming that the two populations
are normally distributed with equal variances, check at the 5% significance level
whether the mean amount of caffeine in 500-gramme jars is greater for Brand 1
than for Brand 2.
Solution. Let the amounts of caffeine in jars of Brand I be referred to as population

1 and those of Brand II be referred to as population 2.
We consider the hypotheses:
H0 : 1 2 versus H1 : 1 > 2 ,
where 1 and 2 are the mean of population 1 and population 2, respectively.

Note that
n1 = 15, x1 = 80, s1 = 5,
and
n2 = 12, x2 = 77, s2 = 6, = 0.05.

1 1
Hence, x1 x2 = 80 77 = 3, t /2,n1 +n2 2 = t0.025,25 2.060, + 0.3873,
n1 n2
and

n1 s21 + n2 s22 15 52 + 12 62
sp = = 5.4626.
n1 + n2 2 15 + 12 2
Therefore, the observed value of the test statistic is

x x2 3
w= 1 = 1.42.
s p n11 + n12 5.4626 0.3873
As 1.42 < 2.06, we can not reject H0 . Thus, we conclude that the mean amount of
caffeine in 500-gramme jars is not greater for Brand 1 than for Brand 2 at the 5%
significance level.

5.4.3 Testing for the variance
In the above subsection, the assumption 1 = 2 is needed. Hence, it is interesting

to perform tests comparing 1 and 2 .
Example 5.19. Find the generalized likelihood ratio test for hypotheses
H0 : 1 = 2 versus H1 : 1 = 2 .
Solution. It can be proved (details omitted) that the generalized likelihood ratio is
( )n1 /2
S2
C 12
S2
[ ](n1 +n2 )/2 ,
S12
n1 2 + n2
S2
where C is a constant.
For w > 0 define the function
wn1 /2
G(w) = .
[n1 w + n2 ](n1 +n2 )/2
Then,
n1 n1 + n2
ln G(w) = ln w ln [n1 w + n2 ] ,
2 2
d n1 n1 + n2 n1
ln G(w) =
dw 2w 2 n1 w + n2
n1 n2 (1 w)
= ,
2w [n1 w + n2 ]
which is negative when w > 1 and is positive when w < 1. Therefore, the value
of G(w) will be small when w is very large or very small. Therefore H0 should be
S2
rejected when 12 is large or small.
S2
n1 S12
n1 (n2 1)S12 (n1 1)12
When H0 is true, = follows Fn1 1,n2 1 by Property 4.3.
n2 (n1 1)S22 n2 S22
(n2 1)22
n1 (n2 1)S12
Thus, we let the test statistic be W = , and the rejection region is
n2 (n1 1)S22
{W F1 /2,n1 1,n2 1 } {W F /2,n1 1,n2 1 }.
Remark 5.4. Recall F ,m,n as the positive real number such that P(X F ,m,n ) =
where X follows Fm,n . Suppose X follows Fm,n . Then 1/X follows Fn,m and
1
F1 ,m,n = ,
F ,n,m
because
( )
1 1
1 = P(F1 ,m,n < X) = P >
F1 ,m,n X
( )
1 1
= = P
F1 ,m,n X
1
= F1 ,m,n = .
F ,n,m
lowing table:
Test H0 H1 Rejection region p-value

{ } ( ( )
n1 (n2 1)S12 n1 (n2 1)s21
Two-tailed 1 = 2 1 = 2 F /2,n 1,n 1 2 min P Fn 1,n 1 ,
{ n2 (n1 1)S22 n2 (n1 1)s
2 1 2 1 2 2
} ( ) )2
n1 (n2 1)S1 n1 (n2 1)s12
F1 /2,n1 1,n2 1 P Fn1 1,n2 1
{ n 2 (n1 1)S 2
2 } ( n2 (n1 1)s2 )
2
n1 (n2 1)S12 n1 (n2 1)s21

Left-tailed 1 = 2 1 < 2 F1 ,n1 1,n2 1 P Fn1 1,n2 1
n2 (n1 1)S22 n2 (n1 1)s22
or 1 2
{ } ( )
n1 (n2 1)S12 n1 (n2 1)s21
Right-tailed 1 = 2 1 > 2 F ,n1 1,n2 1 P Fn1 1,n2 1
n2 (n1 1)S22 n2 (n1 1)s22
or 1 2
Example 5.20. A study involves the number of absences per year among union and
non-union workers. A sample of 16 union workers has a sample standard deviation
of 3.0 days. A sample of 10 non-union workers has a sample standard deviation
of 2.5 days. At the 10% significance level, can we conclude that the variance of
the number of days absent for union workers is different from that for nonunion
workers?
Solution. Let all union workers be referred to as population 1 and all non-union
workers be referred to as population 2.
We consider the hypotheses:
H0 : 1 = 2 versus H1 : 1 = 2 ,
where 12 and 22 are the variance of population 1 and population 2, respectively.

Note that n1 = 16, s1 = 3, n2 = 10, and s2 = 2.5. Hence, the value of the test
statistic is
n1 (n2 1) s21 3.02
= 0.96 = 1.3824.
n2 (n1 1) s22 2.52
Since
1
< 1 < 1.3824 < 3.006 f0.05,15,9 ,
f0.05,9,15
we cannot reject H0 . Thus we conclude that the data do not indicate that the variance
of the number of days absent for union workers is different from that for non-union
workers at the 10% significance level.
Remark 5.5. Since H0 should not be rejected, we may test
H0 : 1 = 2 versus H1 : 1 = 2
using the pooled sample variance.
5.5 Generalized likelihood ratio tests: Large samples
Unfortunately, the likelihood ratio method does not always produce a test statistic
with a known probability distribution. Nevertheless, if the sample size is large, we
can obtain an approximation to the distribution of a generalized likelihood ratio.
Theorem 5.2. Suppose that we are testing
H0 : i = i,0 for all i = 1, 2, . . . , d
versus
H1 : i = i,0 for at least one i = 1, 2, . . . , d
and that is the generalized likelihood ratio. Then, under very general conditions,
when H0 is true,
2 ln d d2 as n .
Remark 5.6. For more general cases, d can be determined by
d = [number of parameters to estimate when determining L( )]

[number of parameters to estimate when determining L(0 )] .
For example, if we test
H0 : i = i,0 for all i = 1, 2, . . . , m
against
H1 : i = i,0 for at least one i = 1, 2, . . . , m,
then d = m.
5.5.1 Goodness-of-fit tests
Suppose m is an integer greater than 1, and there is a population X such that
P(X = ai ) = pi , i = 1, 2, . . . , m,
where i = j implies ai = a j for i, j = 1, 2, . . . , m, pi > 0 for i = 1, 2, . . . , m and

5.5 Generalized likelihood ratio tests: Large samples 95
p1 + p2 + + pm = 1.
Now suppose X1 , X2 , . . . , Xn constitute a random sample of size n from the popu-

lation. For i = 1, 2, . . . , m, let Yi be the number of k such that Xk = ai . Then
n!
P(Yi = yi , i = 1, 2, . . . , m) = py1 py2 pymm
y1 !y2 ! ym ! 1 2
for non-negative integers yi , i = 1, 2, . . . , m, such that y1 + y2 + + ym = n.
We want to test
H0 : pi = pi,0 for all i = 1, 2, . . . , m
versus
H1 : pi = pi,0 for at least one i = 1, 2, . . . , m,
where pi,0 > 0 for i = 1, 2, . . . , m and
p1,0 + p2,0 + + pm,0 = 1.
This is equivalent to testing
H0 : pi = pi,0 for all i = 1, 2, . . . , m 1
versus
H1 : pi = pi,0 for at least one i = 1, 2, . . . , m 1,
where pi,0 > 0 for i = 1, 2, . . . , m 1 and
p1,0 + p2,0 + + pm1,0 < 1.
The likelihood function of the sample is

( )( )nm1 Yi
m1 m1 i=1
n! pYi i 1 pi
i=1 i=1
L(p1 , p2 , . . . , pm1 ) = .
Y1 !Y2 ! Ym1 !(n Y1 Y2 Ym1 )!
Then,
( ) ( )
m1 m1 m1
ln L(p1 , p2 , . . . , pm1 ) = lnC + Yi ln pi + n Yi ln 1 pi ,
i=1 i=1 i=1
m1
ln L(p1 , p2 , . . . , pm1 ) Yi
n Yi
i=1
= , i = 1, 2, . . . , m 1,
pi pi m1
1 pi
i=1
where C does not depend on p1 , p2 , . . . , pm1 .

Denote the value of pi such that
ln L(p1 , p2 , . . . , pm1 )
=0
pi
as pi , i = 1, 2, . . . , m 1. Then,
( )
m1 m1
n Yi Y1 +Y2 + +Ym1 + n Yi
Y1 Y2 Ym1 Yi i=1
= = = = i=1
= ( ) =n
p1 p2 pm1 m1 pi m1
1 pi p1 + p2 + + pm1 + 1 pi
i=1 i=1
for i = 1, 2, . . . , m 1, and hence

Yi
pi = for i = 1, 2, . . . , m 1.
n
Since
ln L(p1 , p2 , . . . , pm1 )
pi < pi > 0,
pi
ln L(p1 , p2 , . . . , pm1 )
pi > pi < 0,
pi
and each of these pi s does not depend on the others, the maximum of L(p1 , p2 , . . . , pm1 )
is thus L( p1 , p2 , . . . , pm1 ).
Therefore the generalized likelihood ratio is
L(p1,0 , p2,0 , . . . , pm1,0 )

=
L( p1 , p2 , . . . , pm1 )
( )nm1 Yi n(1m1
m1 i=1 m1 i=1 pi )
pi,0
Ym1
pY1,0 )n pi 1 pi,0
1 Y2
p2,0 pm1,0 1
m1 (
pi,0

i=1 i=1
= ( )nm1 Yi = .
pi m1
1 pi
m1 i=1 i=1
pi
Y
pY11 pY22 pm1
m1
1
i=1
i=1
From ( )
d x x 1 x
x ln = ln + x = ln + 1
dx x0 x0 x x0
and ( ) ( )
d2 x d x 1
x ln = ln = ,
dx2 x0 dx x0 x
we obtain
x (x x0 )2
x ln = (x x0 ) + + ,
x0 2x0
and therefore,
x (x x0 )2
x ln (x x0 ) + when x x0 .
x0 2x0
Hence, when n ,
m1
1 pi
( ) ( )
m1 m1
pi
2 ln = 2n pi ln
pi,0
+ 2n 1 pi ln

i=1
m1

1 pi,0
i=1 i=1
i=1
[ ] [( ) ( )]
2
m1
( pi pi,0 ) m1 m1
2n ( pi pi,0 ) +
2pi,0
+ 2n 1 pi 1 pi,0
i=1 i=1 i=1
[( ) ( )]2
m1 m1
1 pi 1 pi,0
i=1 i=1
+2n ( )
m1
2 1 pi,0
i=1
m1 m1
(n pi npi,0 )2 m1
= 2n ( pi pi,0 ) + npi,0
+ 2n (pi,0 pi )
i=1 i=1 i=1
[ ( ) ( )]2
m1 m1
n 1 pi n 1 pi,0
i=1 i=1
+ ( )
m1
n 1 pi,0
i=1
[ ( ) ( )]2
m1 m1
n 1 pi n 1 pi,0
m1
(n pi npi,0 )2

i=1 i=1
= + ( )
npi,0 m1
pi,0
i=1
n 1
i=1
will follow approximately m1

2 by Theorem 5.2.
If we let (O for observed frequency and E for expected frequency when H0 is
true)
Oi = Yi = n pi for i = 1, 2, . . . , m 1,
( )
m1 m1
Om = n Yi = n 1 pi ,
i=1 i=1
Ei = npi,0 for i = 1, 2, . . . , m 1,
( )
m1
Em = n 1 pi,0 ,
i=1
then,
m
(Oi Ei )2 m
O2 m m m
O2
2 ln Ei
= i 2 Oi + Ei = i 2n + n
i=1 i=1 Ei i=1 i=1 i=1 Ei
m
O2
= Eii n.
i=1
{ }
(Oi Ei )2
m
Note that {2 ln K} is the rejection region, and ,m1
2
i=1 Ei
can serve as an approximate rejection region. Since this is only an approximate
result, it is suggested that all expected frequencies should be no less than 5, so that
the sample is large enough. To meet this rule, some categories may be combined
when to do so is logical.
Example 5.21. A journal reported that, in a bag of m&ms chocolate peanut candies,
there are 30% brown, 30% yellow, 10% blue, 10% red, 10% green and 10% orange
candies. Suppose you purchase a bag of m&ms chocolate peanut candies at a nearby
store and find 17 brown, 20 yellow, 13 blue, 7 red, 6 green and 9 orange candies, for
a total of 72 candies. At the 0.1 level of significance, does the bag purchased agree
with the distribution suggested by the journal?
Solution. Consider hypotheses:
H0 : the bag purchased agrees with the distribution suggested by the journal,
versus
H1 : the bag purchased does not agree with the distribution suggested by the journal.
Then we have the table below, in which all expected frequencies are at least 5.
Colour Oi Ei Oi Ei
Brown 17 72 30% = 21.6 -4.6
Yellow 20 72 30% = 21.6 -1.6
Blue 13 72 10% = 7.2 5.8
Red 7 72 10% = 7.2 -0.2
Green 6 72 10% = 7.2 -1.2
Orange 9 72 10% = 7.2 1.8
Total 72 72 0
Therefore, as the sample is large enough,

6
O2
2 ln Eii n
i=1
172 + 202132 + 72 + 62 + 92
= + 72
21.6 7.2
6.426 < 9.236 0.1,61
2
.
Alternatively,
6
(Oi Ei )2
2 ln Ei
i=1
(4.6)2 (1.6)2 5.82 (0.2)2 (1.2)2 1.82
= + + + + +
21.6 21.6 7.2 7.2 7.2 7.2
6.426 < 9.236 0.1,61
2
.
Hence we should not reject H0 . At the significance level 10%, we cannot conclude
that the bag purchased does not agree with the distribution suggested by the journal.
Example 5.22. A traffic engineer wishes to study whether drivers have a preference
for certain tollbooths at a bridge during non-rush hours. The number of automobiles
passing through each tollbooth lane was counted during a randomly selected 15-
minute interval. The sample information is as follows.
Tollbooth Lane 1 2 3 4 5 Total
Number of Cars observed 171 224 211 180 214 100
Can we conclude that there are differences in the numbers of cars selecting respec-
tively each of the lanes? Test at the 5% significance level.
H0 : there is no preference among the five lanes,
versus
H1 : there is a preference among the five lanes.
All the five expected frequencies equal 1000 5 = 200, which is not less than 5.
Therefore, as the sample is large enough,
5
O2i
2 ln n
i=1 Ei
1712 + 2242 + 2112 + 1802 + 2142
= 1000
200
10.67 9.488 0.05,51
2
.
Hence, H0 should be rejected. At the significance level 5%, we can conclude that
there are differences in the numbers of cars selecting respectively each of the lanes.
When testing goodness of fit to help select an appropriate population model, we

usually are interested in testing whether some family of distributions seems appro-
priate and are not interested in the lack of fit due to the wrong parameter values.
Suppose we want to test
H0 : the population follows a particular distribution with k unknown parameters.
For calculating Ei s, we have to use the maximum likelihood estimate of the un-
known parameters. Then the rejection region is {2 ln K} or, approximately,
{ }
m
(Oi Ei )2
Ei ,m1k .2
i=1
5.5.2 Pearson Chi-squared test of independence
Consider the following joint distribution of two discrete random variables X and Y :
Value of Y
Probability Row sum
b1 bj bc
a1 p1,1 p1, j p1,c p1.

Value of X ai pi,1 pi, j pi,c pi.

ar pr,1 pr, j pr,c pr.
Column sum p.1 p. j p.c 1
We want to test
H0 : X and Y are independent
versus
H1 : X and Y are not independent.
That is, we want to test
H0 : pi, j = pi p j for i = 1, 2, . . . , r 1 and j = 1, 2, . . . , c 1
versus
H1 : pi, j = pi p j for at least one i and j,

where i = 1, 2, . . . , r 1 and j = 1, 2, . . . , c 1.
A random sample of size n taken from this distribution is a set of n indepen-

dent vectors, or ordered pairs of random variables, (X1 ,Y1 ), (X2 ,Y2 ), . . ., (Xn ,Yn )
each following this distribution. From such a sample we obtain the following table,
where Oi, j (called the observed frequency of the (i, j)-th cell) is the number of k
such that Xk = ai and Yk = b j , i = 1, 2, . . . , r, j = 1, 2, . . . , c. A box containing an ob-
served frequency is called a cell. Such a two-way classification table is also called a
contingency table or cross-tabulation. Ours is an r c contingency table.
Value of Y
Observed frequency Row sum
b1 bj bc
a1 O1,1 O1, j O1,c n1.

Value of X ai Oi,1 Oi, j Oi,c ni.

ar Or,1 Or, j Or,c nr.
Column sum n.1 n. j n.c n
Let be the generalized likelihood ratio. Then it can be proved that
( )
r c O2 r c O2
r c
(Oi, j Ei, j )2
2ln = n = n
i, j i, j
1
i=1 j=1 Ei, j i=1 j=1 Ei, j i=1 j=1 ni n j
ni n j
where Ei, j = is the expected frequency corresponding to Oi, j when H0 is true,
n
i = 1, 2, . . . , r and j = 1, 2, . . . , c. The rejection region is approximately
{ }
r c
(Oi, j Ei, j )2
Ei, j
2 ,(r1)(c1) ,
i=1 j=1
where
the number of degrees of freedom

= [number of parameters to estimate when determining L( )]
[number of parameters to estimate when determining L(0 )]
= (rc 1) [(r 1) + (c 1)]
= rc r c + 1
= (r 1)(c 1).
This test is called the Pearson Chi-squared test of independence. As in previous

sections, we require each expected frequency to be at least 5.
Example 5.23. Suppose we draw a sample of 360 students and obtain the following
information. At the 0.01 level of significance, test whether a students ability in
mathematics is independent of the students interest in statistics.
Ability in Math
sum
Low Average High
Low 63 42 15 120
Interest in Statistics Average 58 61 31 150
High 14 47 29 90
Sum 135 150 75 360
H0 : ability in mathematics and interest in statistics are independent,
versus
H1 : ability in mathematics and interest in statistics are not independent (are related).
The table below shows the expected frequencies (where, for example, 45 = 120
135 360 and 50 = 120 150 360).
Ability in Math
sum
Low Average High
Low 45 50 25 120
Interest in Statistics Average 56.25 62.5 31.25 150
High 33.75 37.5 18.75 90
Sum 135 150 75 360
All expected frequencies are at least 5. Therefore, as the sample is large enough,
( ) ( )
r c O2
632 422 292
n
i, j
1 = 360 + ++ 1
i=1 j=1 ni n j 120 135 120 150 90 75
32.140 13.277 0.01,(31)(31)
2
.
Hence, at the significance level 1%, we reject H0 and conclude that there is a re-
lationship between a students ability in mathematics and the students interest in
statistics.
Alternatively, the value of the test statistic equals
3 3
(Oi, j Ei, j )2 (63 45)2 (42 50)2 (29 18.75)2
Ei, j
=
45
+
50
+ +
18.75
i=1 j=1
32.140 13.277 0.01,(31)(31)

2
.

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Instructor: Dr. Ke Zhu

5.3 Generalized likelihood ratio tests: One-sample case . . . . . . . . . . . . . . 72

1.1 Random variable and probability function

is a measurable function from the set of possible outcomes to some realization

Definition 1.1. (Probability function) The probability function P is a set function

(3) If A1 , A2 , are events and Ai A j = 0/ for i = j, then

P(A1 A2 ) = P(A1 ) + P(A2 ) + .

If E contains only a finite number of points, X is called a discrete random vari-

Example 1.1. (Toss a coin once)

Example 1.2. (Toss a coin twice)

Example 1.3. (Stock price)

1.2 Discrete distribution

Let x be a realization of a discrete random variable X R. Then,

Theorem 1.1. (Discrete univariate probability density function) A discrete univari-

(1) f (x) > 0 for x E;

Based on the p.d.f. f (x), we define the function F(x) by

F(x) = P(X x) = f (e).

Theorem 1.2. (Discrete cumulative distribution function) A discrete univariate cu-

f (x) = F(x) F(x) for x E.

What is the c.d.f. of 2X + 1?

Then, what is the value of c?

Usually, f (x1 , , xs ) is called the joint p.d.f. of random variables X1 , X2 , , Xs .

Theorem 1.3. (Discrete multivariate probability density function) A discrete multi-

f (x1 , x2 , , xs ) = f1 (x1 ) f2 (x2 ) fs (xs ) for (x1 , x2 , , xs ) E.

Otherwise, we say that X1 , , Xs are dependent.

Theorem 1.4. (Discrete multivariate cumulative distribution function) A discrete

f (e1 , e2 ) = f (e1 , e2 ) + f (e1 , e2 )

f (x, y) = F(x, y) F(x, y) F(x, y) + F(x, y)

which entails that X and Y are independent.

P(X A,Y B) = P(X A)P(Y B);

P(X A,Y B) = P(X = x,Y = y) (by Theorem 1.3(3))

= P(X = x)P(Y = y) (by independence)

= P(X A)P(Y B) (by Theorem 1.3(3))

P(g(X) = , h(Y ) = ) = P(X A,Y B)

The marginal p.d.f. of Y is

Since f (x, y) = f1 (x) f2 (y) for x = 1, 2, 3 and y = 1, 2, X and Y are independent.

Solution. Note that for z 1,

P(Z > z) = P(X > z,Y > z)

Hence, for any z 0,

P(Z = z) = P(Z > z 1) P(Z > z) = (1 )( )z .

That is, Z is also a geometric random variable with parameter .

x1 , , xk are nonnegative integers such that x1 + + xk = n.

1.3 Continuous distribution

Let X R be a continuous random variable. The probability of X lies in an interval

Theorem 1.5. (Continuous univariate probability density function) A continuous u-

Based on the p.d.f. f (x), the c.d.f of X is defined as

Example 1.9. (Uniform distribution) A random variable X has a uniform distribution

Briefly, we say that X U(a, b).

Property 1.3. If F is a continuous c.d.f. and X U(0, 1), then Y = F 1 (X) F.

Example 1.10. (Normal distribution) A random variable X has a normal distribution

Numerical approximations for (x) have been well tabulated in practice.

Proof. Let FX (x) be the c.d.f. of X. Then, the c.d.f. of Y is

Fig. 1.2 The p.d.f f (x) of N( , 2 ).

This completes the proof.

Theorem 1.6. (Continuous multivariate probability density function) A continuous

for xk R; and we say X1 , , Xs are independent if and only if

f (x1 , , xs ) = f1 (x1 ) fs (xs )

which also satisfies Theorem 1.4. It is worth noting that

2 F(x, y) 2 FX (x)FY (y) FX (x) FY (y)

P(X A,Y B) = P(X A)P(Y B);

Proof. (a) Note that

P(g(X) , h(Y ) ) = P(X A,Y B)