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Abul Kalam Azad Assistant Professor Department of Economics

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17 views36 pages

Abul Kalam Azad Assistant Professor Department of Economics

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KM Seyam
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 5: TWO-VARIABLE REGRESSION: INTERVAL

ESTIMATION AND HYPOTHESIS TESTING

Abul Kalam Azad


Assistant Professor
Department of Economics

Textbook: Damodar N. Gujarati (2004) Basic Econometrics,


4th edition, The McGraw-Hill Companies
Interval Estimation: CONFIDENCE
INTERVAL FOR β1 and β2
Important feature of the confidence intervals

• In both cases, the width of the confidence interval is


proportional to the standard error of the estimator.
That is, the larger the standard error, the larger is the
width of the confidence interval. Put differently, the
larger the standard error of the estimator, the greater
is the uncertainty of estimating the true value of the
unknown parameter.
• Thus, the standard error of an estimator is often
described as a measure of the precision of the
estimator,
5.4 CONFIDENCE INTERVAL FOR σ2
5.4 CONFIDENCE INTERVAL FOR σ2
5.4 CONFIDENCE INTERVAL FOR σ2
5.4 CONFIDENCE INTERVAL FOR σ2
5.5 HYPOTHESIS TESTING: GENERAL COMMENTS
Simple and Composite Hypothesis
5.5 HYPOTHESIS TESTING:
GENERAL COMMENTS

1. Confidence interval approach


2. Test of significance approach

Both these approaches predicate that the variable (statistic or


estimator) under consideration has some probability distribution and
that hypothesis testing involves making statements or assertions about
the value(s) of the parameter(s) of such distribution.
5.6 HYPOTHESIS TESTING:
THE CONFIDENCE-INTERVAL APPROACH

95 % CI for Beta-2 is (0.4268, 0.5914).


• In statistics, when we reject the null hypothesis, we
say that our finding is statistically significant.
• On the other hand, when we do not reject the null
hypothesis, we say that our finding is not statistically
significant.
Two-sided test vs. one-sided test

• → two-sided test

• → one-sided test
5.7 HYPOTHESIS TESTING:
THE TEST-OF-SIGNIFICANCE APPROACH
• Broadly speaking, a test of significance is a procedure by
which sample results are used to verify the truth or falsity of
a null hypothesis.
• The key idea behind tests of significance is that of a test
statistic (estimator) and the sampling distribution of such a
statistic under the null hypothesis.
• The decision to accept or reject H0 is made on the basis of
the value of the test statistic obtained from the data at hand.
5.7 HYPOTHESIS TESTING:
THE TEST-OF-SIGNIFICANCE APPROACH

• This variable follows the t distribution with


n−2 df.
5.7 HYPOTHESIS TESTING:
THE TEST-OF-SIGNIFICANCE APPROACH

• is the value of β2 under H0 and where −tα/2 and tα/2 are the
values of t (the critical t values) obtained from the t table for (α/2)
level of significance and n − 2 df.
5.7 HYPOTHESIS TESTING:
THE TEST-OF-SIGNIFICANCE APPROACH
5.7 HYPOTHESIS TESTING:
THE TEST-OF-SIGNIFICANCE APPROACH
5.7 HYPOTHESIS TESTING:
THE TEST-OF-SIGNIFICANCE APPROACH
5.7 HYPOTHESIS TESTING:
THE TEST-OF-SIGNIFICANCE APPROACH
5.7 HYPOTHESIS TESTING:
THE TEST-OF-SIGNIFICANCE APPROACH
• Since we use the t distribution, the preceding testing
procedure is called appropriately the t-test.
• In the language of significance tests, a statistic is said to
be statistically significant if the value of the test statistic
lies in the critical region. In this case, the null hypothesis
is rejected.
• By the same token, a test is said to be statistically
insignificant if the value of the test statistic lies in the
acceptance region. In this situation, the null hypothesis is
not rejected.
• In our example, the t-test is significant, and hence we
reject the null hypothesis.
5.7 HYPOTHESIS TESTING:
THE TEST-OF-SIGNIFICANCE APPROACH

• To test this hypothesis, we use the one-tail test (the right tail),
as shown in Figure 5.5.
• The test procedure is the same as before except that the
upper confidence limit or critical value now corresponds to tα
= t0.05, that is, the 5 percent level. As Figure 5.5 shows, we
need not consider the lower tail of the t distribution in this
case.

• CI = (- ∞, 0.3664)
TABLE 5.1
Testing the Significance of σ2: The χ2 Test
Testing the Significance of σ2: The χ2 Test
The Meaning of “Accepting” or “Rejecting”
a Hypothesis
The Exact Level of Significance: The p Value

• Once a test statistic (e.g., the t statistic) is obtained in a given


example,
• why not simply go to the appropriate statistical table and find out
the actual probability of obtaining a value of the test statistic as
much as or greater than that obtained in the example?
• This probability is called the p value (i.e., probability value), also
known as the observed or exact level of significance or the exact
probability of committing a Type I error.
• More technically, the p value is defined as the lowest significance
level at which a null hypothesis can be rejected.
5.9 REGRESSION ANALYSIS AND ANALYSIS
OF VARIANCE
• TSS = ESS + RSS

• A study of these components of TSS is known as the analysis


of variance (ANOVA) from the regression viewpoint.
5.9 REGRESSION ANALYSIS AND ANALYSIS
OF VARIANCE
5.9 REGRESSION ANALYSIS AND ANALYSIS
OF VARIANCE
5.9 REGRESSION ANALYSIS AND ANALYSIS
OF VARIANCE
5.11 REPORTING THE RESULTS OF
REGRESSION ANALYSIS
5.11 REPORTING THE RESULTS OF
REGRESSION ANALYSIS

In Eq. (5.11.1) the figures in the first set of parentheses are the estimated
standard errors of the regression coefficients, the figures in the second set are
estimated t values computed from (5.3.2) under the null hypothesis that the
true population value of each regression coefficient individually is zero (e.g.,
3.8128 = 24.4545 ÷ 6.4138), and the figures in the third set are the estimated p
values. Thus, for 8 df the probability of obtaining a t value of 3.8128 or greater
is 0.0026 and the probability of obtaining a t value of 14.2605 or larger is about
0.0000003.
• jb resid

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