On Insensitivity of the Chi-Square Model Test to Nonlinear Misspecification in Structural Equation Models

In this paper, we show that for some structural equation models (SEM), the classical chi-square goodness-of-fit test is unable to detect the presence of nonlinear terms in the model. As an example, we consider a regression model with latent variables and interactions terms. Not only the model test has zero power against that type of misspecifications, but even the theoretical (chi-square) distribution of the test is not distorted when severe interaction term misspecification is present in the postulated model. We explain this phenomenon by exploiting results on asymptotic robustness in structural equation models. The importance of this paper is to warn against the conclusion that if a proposed linear model fits the data well according to the chi-quare goodness-of-fit test, then the underlying model is linear indeed; it will be shown that the underlying model may, in fact, be severely nonlinear. In addition, the present paper shows that such insensitivity to nonlinear terms is only a particular instance of a more general problem, namely, the incapacity of the classical chi-square goodness-of-fit test to detect deviations from zero correlation among exogenous regressors (either being them observable, or latent) when the structural part of the model is just saturated.