The Theory and Practice of Point-Optimal Testing

It is argued that the general formulation of point-optimal tests, as summarized in King (1988): i) makes use of a benchmark which is excessively stringent; ii) fails to integrate the method with traditional testing methods; iii) uses data to form a specific null hypothesis; iv) offers no guidance as to proper procedures in the event the null is rejected; v) eschews the use of Bayesian methods while demanding the use of prior information; and vi) yields tests with unknown power in the presence of specification error. For these reasons, point-optimal testing cannot yet be recommended as part of the econometrician's repertoire.