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Econometrics

Section 5

Econometrics () Inference in Multiple Regression Section 5 1 / 16

Multiple Regression

Assumptions

MLR.1: Linear in parameters

MLR.2: Random sampling

MLR.3: No perfect collinearity

MLR.4: E(u|x)=0

MLR.5: Var(u|x)=

2

MLR.6: Unobserved error is normally distributed

Assumption MLR.6 makes t-tests and F-tests possible.

Econometrics () Inference in Multiple Regression Section 5 2 / 16

Testing Hypotheses of Single Parameter

Steps:

1

Specify a null hypothesis

2

Specify an alternative hypothesis

3

Determine a signicance level

4

Determine the proper test statistic

5

Find the critical value for the test statistic

6

Calculate the test statistic for the estimated coecient(s)

7

Compare the calculated test statistic to the critical value

8

If the calculated test statistic is larger than the absolute value of the critical

value, then we reject the null or the coecient is statistically signicant.

Econometrics () Inference in Multiple Regression Section 5 3 / 16

Testing Hypotheses of Single Parameter

Setting up a Hypothesis

H

0

:

j

= 0

H

A

:

j

= 0

or

H

0

:

j

= 0

H

A

:

j

> 0

Econometrics () Inference in Multiple Regression Section 5 4 / 16

Testing Hypotheses of Single Parameter

The t test

b

j

j

se(

b

j

)

t

nk1

Read: The dierence between the estimated coecient and the true coecient, divided

by the standard error of the coecient, is distributed t with degrees of freedom n-k-1

where n is the number of observations, k is the number of s estimated excluding the

intercept, and 1 represents the intercept.

Econometrics () Inference in Multiple Regression Section 5 5 / 16

Testing Hypotheses of Single Parameter

Degrees of Freedom

The amount of data that is left over after the calculations are made.

Econometrics () Inference in Multiple Regression Section 5 6 / 16

Testing Hypotheses of Single Parameter

One-tailed tests

Econometrics () Inference in Multiple Regression Section 5 7 / 16

Testing Hypotheses of Single Parameter

Two-tailed tests

Econometrics () Inference in Multiple Regression Section 5 8 / 16

Testing Hypotheses of Single Parameter

p-values

P (|T| > c

) = p

Econometrics () Inference in Multiple Regression Section 5 9 / 16

Testing Hypotheses of Single Parameter

Condence Intervals

j

c

se(

b

j

)

Econometrics () Inference in Multiple Regression Section 5 10 / 16

Testing Hypotheses of Multiple Parameters

The F Test

The F test is used to test the equality of multiple parameters, simultaneously.

Econometrics () Inference in Multiple Regression Section 5 11 / 16

Testing Hypotheses of Multiple Parameters

The F Test

For example:

H

0

:

1

= 0,

2

= 0, ...,

k

= 0

H

A

: H

0

is not true

Econometrics () Inference in Multiple Regression Section 5 12 / 16

Testing Hypotheses of Multiple Parameters

The F Statistic

F

SSR

r

SSR

ur

/q

SSR

ur

/(n k 1)

where q=numerator degrees of freedom=df

r

df

ur

SSR

r

: sum of squared residuals from restricted model

SSR

ur

: sum of squared residuals from unrestricted model

Econometrics () Inference in Multiple Regression Section 5 13 / 16

Testing Hypotheses of Multiple Parameters

The F Test

Econometrics () Inference in Multiple Regression Section 5 14 / 16

In-Class Questions

Question 1

The variable rditens is expenditures on R&D as a percentage of sales. Sales are measured

in millions of dollars. The variable profmarg is prots as a percentage of sales. Using the

data in RDCHEM.RAW for 32 rms in the chemical industry, the following equation is

estimated:

(1.369) (.216) (.046)

n=32 R

2

=0.99

1

Interpret the coecient on log(sales). In particular, if sales increase by 10%, what is

the estimated percentage point change in rditens? is this an economically large

eect?

2

Test the hypothesis that R&D intensity does not change with sales against the

alternative that it does increase with sales. do the test at the 5% level.

3

Interpret the coecient on profmarg. Is it economically large?

4

Does profmarg have a statistically signicant eect on rditens?

Econometrics () Inference in Multiple Regression Section 5 15 / 16

In-Class Questions

Question 2

The dataset 401KSUBS.RAW contains information on net nancial wealth (nettfa), age

of the survey respondent (age), annual family income (inc), family size (fsize), and

participation in certain pension plans for people in the United States. The wealth and

income variables are both recorded in thousands of dollars. For this question, use only

the data for single-person households (fsize = 1).

1

How may single-person households are there in the dataset?

2

Use OLS to estimate the model

nettfa =

0

+

1

inc +

2

inc + u

and report the results using the usual format. Interpret the slope coecients. Are

there any surprises in the slope estimates?

3

Does the intercept from the regression in part (ii) have an interesting meaning?

Explain.

4

Find the p-vale for the test H

0

:

2

= 1 against H

1

:

2

< 1. Do you reject H

0

at the

1% signicance level?

5

If you do a simple regression of nettfa on inc, is the estimated coecient on inc

much dierent from the estimate in part (ii)? Why or why not?

Econometrics () Inference in Multiple Regression Section 5 16 / 16

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