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2012
2012
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Outline
Finite-sample inference in linear models: the normality assumption Sampling distributions of the OLS estimators Hypothesis tests: a single restriction The t test Hypothesis tests: multiple linear restrictions The F test Reading: Wooldridge Chapter 4, Appendix C6 Mathematics and Statistics: standard normal, t and F distributions, statistical hypotheses, test statistics, rejection rules, signicance level, critical values, p-value, degrees of freedom. . .
Yuyi LI (University of Manchester) Inference in Linear Regression Models 2012 2 / 27
j N (j , Var (j )),
j = 0, 1, 2, . . . , k
where Var (j ) = 2 (X X)1 and (X X)1 denotes the (j + 1)-th jj jj leading diagonal element of (X X)1 .
Then, an infeasible distribution follows
j j Var (j )
Yuyi LI (University of Manchester)
N (0, 1)
2012
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j j tn1k , for j = 0, 1, . . . , k se (j )
where tdf is a t distribution with df degrees of freedom tdf approximates N (0, 1) when df is large (> 120) This can be used to test hypothesis on j
Yuyi LI (University of Manchester) Inference in Linear Regression Models 2012 5 / 27
Hypotheses
Consider MLR model y = 0 + 1 x1 + 2 x2 + . . . + k xk + u The null and alternative hypotheses (H0 and H1 ) Examples of hypotheses:
(i) H0 : 1 = 0 (a restriction on one parameter) x1 has no impact on y (ii) H0 : 1 2 = 0 (a linear restriction on parameters) x1 and x2 have equivalent effects on y (iii) H0 : 1 = 2 = k = 0 (multiple linear restrictions) x1 , x2 and xk have no joint explanatory power on y
Note, selection of is somewhat arbitrary Note, rejection decision is made by comparing test statistic and corresponding critical value Note, critical values depend on , H1 , and statistic distribution under H0
Yuyi LI (University of Manchester) Inference in Linear Regression Models 2012 7 / 27
An alternative: Given the test statistic, what is the smallest signicance level at which H0 would be rejected? This is called the p-value of the test. The p-value (p) is the probability of observing a test statistic (T ) as extreme as we did if H0 is true:
E.g. t test for H0 : j = 0 against H1 : j 0 = p = Pr(|T | > |t |), where t is the observed t test statistic
E.g. H0 : 1 = 0, H1 : 1 0, t t930 , observed value of t = 2.137642 and p = 0.0328. Then H0 is rejected at 5% level, but not at 1% level. Precisely, H0 is rejected at all signicance levels 3.28%
Yuyi LI (University of Manchester) Inference in Linear Regression Models 2012 8 / 27
The t Test
A Single Parameter
j j j c = tn1k under H0 se (j ) se (j )
(1)
Example: if j = 0.8 and se (j ) = 0.2, the test statistic for H0 : j = 1 is t = (0.8 1)/0.2 = 1 Next, we introduce a special case when c = 0
Yuyi LI (University of Manchester) Inference in Linear Regression Models 2012 9 / 27
The t Test
A Single Parameter
j j j 0 j t= = = tn1k under H0 se (j ) se (j ) se (j )
These t statistics are routinely reported in EViews Alternatives and Rejection Rules:
Alternative Rejection Rule
Yuyi LI (University of Manchester)
H1 : j 0 |t | > tcv
2012 10 / 27
The t Test
A Single Parameter
Example
Test H0 : 1 = 1 against H1 : 1 < 1 with = 0.01 y = 0 + 1 x1 + 2 x2 + u y = 0.2 + 0.8 x1 1.2 x2
(0.03) (0.2) (0.05)
Critical value tcv = 2.326 (from t350 , 1-tailed H1 , = 0.01) Reject H0 if t < tcv : Fail to reject H0 , as t > tcv here
Yuyi LI (University of Manchester) Inference in Linear Regression Models 2012 11 / 27
The t Test
The t Test
Equivalence of Educations
Consider the population model log(wage ) = 0 + 1 x1 + 2 x2 + 3 x3 + u
x1 =the number of years in junior college x2 =the number of years in university x3 =the number of months in workforce
(2)
H0 : 1 = 2 . What does it mean? H1 : 1 < 2 . What does this imply? The hypotheses can be rewritten as H0 : 1 2 = 0, H1 : 1 2 < 0.
The following slides are based on Wooldridge section 4.4, which mainly details two methods of obtaining the standard error of a linear combination of paramter estimators. Wooldrige section 4.4 (page 140- )
Yuyi LI (University of Manchester) Inference in Linear Regression Models 2012 13 / 27
The t Test
1 2 se (1 2 )
(3)
[se (1 )]2 + [se (2 )]2 2s12 , where a hat indicates an unbiased estimator and s12 = Cov (1 , 2 ).
Yuyi LI (University of Manchester) Inference in Linear Regression Models 2012 14 / 27
The t Test
The t Test
OLS estimator is = (X X)1 X y. Covariance matrix is Var (|X) = 2 (X X)1 , and an unbiased estimator is SSR (X X)1 Var (|X) = 2 (X X)1 = n1k What is the structure of Var (|X)?
Yuyi LI (University of Manchester) Inference in Linear Regression Models 2012 16 / 27
The t Test
If we compute Var (|X), it is straightforward to obtain se (1 ), se (2 ) and s12 = se (1 2 ) can be obtained = Statistic (3) can be computed = Testing H0 is possible! is 4 1 here. How to generalise to (k + 1) 1?
Yuyi LI (University of Manchester) Inference in Linear Regression Models 2012 17 / 27
The t Test
(4)
The t Test
The F Test
(5)
What is q under each of the above H0 ? Alternative hypotheses: H1 : H0 does not hold. Note, H0 is violated as long as one restriction fails To construct the F test, we need to identify the restricted model and unrestricted model. . .
Yuyi LI (University of Manchester) Inference in Linear Regression Models 2012 20 / 27
The F Test
Unrestricted model: (5) without any restrictions Estimating restricted model yields SSRr (Sum of Squared Residuals in the restricted model) Estimating unrestricted model yields SSRur (Sum of Squared Residuals in the unrestricted model) Always, SSRur SSRr .
Yuyi LI (University of Manchester) Inference in Linear Regression Models 2012 21 / 27
The F Test
where q = number of restrictions under H0 (numerator df ), n 1 k = unrestricted model df (denominator df ), Fq,n1k = an F distribution with q and (n 1 k ) df df = degrees of freedom
F 0. Why? Reject H0 if F > Fcv (critical value from Fq,n1k ). Fail to reject H0 otherwise.
Yuyi LI (University of Manchester) Inference in Linear Regression Models 2012 22 / 27
The F Test
where lw = log (wage ) (monthly), ed = years in education, ex = years of work experience, te = years in the current employment, hr = average weekly working hours, and u denotes the random error term.
te and hr are irrelevant to wage (dropped in (6))? H0 : 3 = 4 = 0 against H1 : 3 0 or/and 4 0. OLS regression of (unrestricted) model (6): SSRur Restricted model (under H0 ; 2 restrictions, q = 2) lw = 0 + 1 ed + 2 ex + u: SSRr .
Yuyi LI (University of Manchester) Inference in Linear Regression Models 2012 23 / 27
The F Test
Critical value Fcv = 4.61 (from F2,930 , = 0.01) Since F 15.70 > Fcv , H0 is rejected at 1% signicance level Statistically, years in the current employment (te) and average weekly working hours (hr) have some joint effect on wage.
Yuyi LI (University of Manchester) Inference in Linear Regression Models 2012 24 / 27
The F Test
The F Test
Appendix
R-Squared Form of the F Statistic. By denition, R2 = SSE SSR =1 = SSR = SST (1 R 2 ) SST SST
2 This means, SSRur = SST (1 Rur ), SSRr = SST (1 Rr2 ) in the unrestricted and restricted models. Then F statistic becomes 2 [SST (1 Rr2 ) SST (1 Rur )]/q (SSRr SSRur )/q = 2 SSRur /(n 1 k ) [SST (1 Rur )]/(n 1 k ) 2 2 [(1 Rr2 ) (1 Rur )]/q (Rur Rr2 )/q = = 2 2 (1 Rur )/(n 1 k ) (1 Rur )/(n 1 k )
F =
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