Likelihood-Based Confidence Intervals for the Parameters of a Simple Linear Regression Model with Cauchy Errors

Abstract

The estimators of the slope and the intercept of simple linear regression model with normal errors are normally distributed and their exact confidence intervals are constructed using the t-distribution. However, when the normality assumption is not fulfilled, it is not possible to obtain exact confidence intervals. The Wald method of interval estimation is commonly used to provide approximate confidence intervals in such cases, and since it is derived from the central limit theorem it requires large samples in order to provide reliable approximate confidence intervals. This paper considers an alternative method of constructing approximate confidence intervals for the parameters of a simple linear regression model with Cauchy errors which is based the normal approximation to the Cauchy likelihood. The normal approximation to the Cauchy likelihood is obtained by a Tailor series expansion of the Cauchy log-likelihood function about the maximum likelihood estimate of the parameters and ignoring terms of order greater two. The maximized relative log-likelihood function for each parameter is then derived from the normal Cauchy relative log-likelihood function. The approximate confidence intervals for the parameters are constructed from their respective maximized relative log-likelihood functions. These confidence intervals have closed form confidence limits, are short and have coverage probabilities close to the nominal value 0.95.