Testing piecewise structural equations models in the presence of latent variables and including correlated errors

Path models, expressed as Directed Acyclic Graphs (DAGs), and the testing of such DAGs via a d-sep test, have become popular because they can incorporate complicated data structures that are difficult or impossible to accommodate in classical structural equation modeling. However, d-sep tests cannot accommodate DAGs that include unmeasured (latent) variables. We describe (i) how to convert a DAG with latent variables into an observationally equivalent graph without latents (a Mixed Acyclic Graph, MAG), (ii) how this MAG identifies which latents can/cannot be ignored without changing the causal meaning of the original DAG, and (iii) how to perform the MAG equivalent of a d-sep test.