I.SamplingDistributionoftheOLS Estimation
II.TestingHypothesisaboutaSinglePopulationParameter
tTest
III.ConfidenceInterval
IV.TestingHypothesisAboutaSingleLinear Combinationof
theParameters
V.TestingMultipleLinearRestrictions:FTest
VI.MLEstimationandLRStatistic
4.MultipleRegressionAnalysis:
Inference
Read Wooldrige (2013), Chapter 4
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I.SamplingDistributionsofthe
OLSEstimations
CLMAssumptions
Dependontheunderlyingdistributionoftheerrors.
Sofar,weknowthatgiventheGaussMarkov
assumptions,OLSisBLUE.
theu thing!
MLR.6NormalityAssumption
Inordertodoclassicalhypothesistesting,we
needtoaddanotherassumption normality.
u Normal(0,2)
Theerroru isindependentofexplanatoryvariablesx1,,xk andisnormally
distributed withmeanzeroandvariance2
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TheNormalityofy
MLR.6incorporates twoassumptions
1. MLR.4 Zero Conditional Mean
E(u|x1,,xk) = E(u) = 0
2. MLR.5 Homoskedasticity
Var(u|x1,,xk) = Var(u) = 2
Withtheassumptiononnormality
u Normal(0,2),
y|x N(0 +1x1 +2x2++kxk,2)
E(y|x)
=0 +1x1 +2x2++kxk
VAR(y|x) =2
Largesampleswillletusdropnormalityassumption.
MinimumVarianceUnbiasedEstimators
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Theorem4.1(NormalSamplingDistributions) UndertheCLM
assumptions,conditionalonx1,x2,,xk,
~ Normal[j,Var( )]
f(y|x)
.
.
E(y|x) = 0 + 1x
Normal
distributions
x1
I. Distribution II. T-test
x2
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II.TestingHypothesisabout
asinglej
Theorem4.2:tDistribution
UndertheCLMassumptionsMLR.1 MLR.6
Giventhepopulationmodel
Wewanttotesthypothesisaboutaparticularj
Example:
log(wage) = 0 + 1educ + 2exper + 3tenure + u
Show:tDistributionforthestandardizedestimators
Hint:
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tdf
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tstatisticor tratio
NullHypothesis:H0 :j =0
*Wehypothesizethatthetrueparametervalueiszero.
Itisthetratioundertheassumptionofthenullhypothesis.
Example
log(wage) = 0 + 1educ + 2exper + 3tenure + u
featuresoftratio
(1) hasthesamesignas .
H0: 1=0
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OnesidedAlternatives
SignificanceLevel
If we want to have only a 5% probability of rejecting H0 if it is
really true, then we say our significance level is 5%
Generally, we choose = 5%
H0:1=0
Drawagraphofthesamplingdistributionoftwithnk1
degreesoffreedom
Weneedtodecideonrelevantalternativehypothesiswhether
thepopulationvalueispositiveornegative.
AlternativeHypothesis:
H1:1>0
Wewantsufficientlylarge positivevalueof
Thisisanonesidedalternative.
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inorder
torejectH0 infavorofH1.
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One-Sided Alternatives
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Rejectionrule
yi = 0 + 1xi1 + + kxik + ui
H0 : j = 0
H1 : j > 0
Suppose =5%
H0: j = 0
H1: j > 0
Rejectionrule: >c
Fail to reject
reject
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c:criticalvalue
cisthe95th percentileinthetdistributionwithnk1degreesof
freedom.
Question:Supposethereareeightobservationsandoneindependent
variable.Whatisthecriticalvalue?
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Example Onetailedtest
EffectofACTscoresonGPA
=0.5681+0.1021ACT
(s.e.)(0.92842)(0.03569)
{tstat}{0.611933}{2.863324}
Choose =5%;DF=6;c=1.943
Question:Whatcanyousayaboutthestatistical
significanceof and ?
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Effectofcigs scoresonbwght
log()=4.769 0.00449cigs
(s.e.)(.0054)(.000849)
{tstat}{888.3}{5.2898}
n=1388;R2 =.02
Choose =5%;DF=1386
Question:Whatcanyousayaboutthestatisticalsignificanceof
and ?
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Eviews:log(bwght)ccigs
Example Onetailedtest
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Std. Error
t-Statistic
0.005369
888.2632
0.000849
-5.289769
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
F-statistic
Prob(F-statistic)
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Prob.
0
0
4.760031
0.190662
-0.494453
-0.486909
27.98166
0
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Two-Sided Alternatives
TwoSidedAlternatives
yi = 0 + 1Xi1 + + kXik + ui
Goal:totestthenullhypothesis
H0 :j =0
againstatwosidedalternative:
H1 :j 0
H0 : j = 0
H1 : j 0
fail to reject
Rejectionrule: | |>c
reject
Choosing =5%
Notethatforatwotailedtest,cischosentomakethe
areaineachtailequal2.5%
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-c
21
H0:j =0
H1:j 0
xj isstatisticallysignificantatthe5%level.
xj isstatisticallydifferentfromzeroatthe5%level.
IfH0 isnotrejected,wesaythat
xj isstatisticallyinsignificantatthe5%level
Technically,dontsay thatH0isacceptedatthe5%level.
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EffectofACTscoresonGPA
=0.5681+0.1021ACT
(s.e.)(0.92842)(0.03569)
{tstat}{0.611933}{2.863324}
n=8;R2=.577424
H0:0 =0;H1:0 0
=.61193
Choose =5%;nk1=6;c=2.447
Question:DowerejectH0?
H0:1 =0;H1:1 0
t1^ =2.863
Question:DowerejectH0?
IfH0 isrejectedinfavorH1,wesaythat
reject
22
Example:GPA ACT
Howtosayit?
Given
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Testingotherhypothesisaboutj
Example:Effectofeduc onlog(wage)
log()=0.284+0.092educ +.0041exper +0.022tenure
(s.e.)
(.10419)(.00733)(.001723)(.003094)
{tstat}{2.73}{12.56}{2.39}{7.13}
n=526; R2=0.316013
H0 : j = 0.1
H1 : j aj
where aj is the hypothesized value
Theappropriatetstatisticis
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Rules ofThumb:
=1%forafewthousand
=5%forafewhundred
=10%forasmallsample sayn=30
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RejectionRule: pvalue<
Thisimpliesthatsmallpvaluesareevidenceagainstthe
null.
TwoNotes
1.Reportedpvalue fortestingthenullhypothesisH0 isusually
againsttwosidedalternatives.
2.Foronesidedalternative,thepvalueisequaltotwosidedpvalue
divided by2.
Mathematically,
Lett:valueoftheteststatistic
Tbeatdistributedrandomvariable
pvalue=P(|T|>|t|)
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pvalue forthettest:
Itisthesmallestsignificancelevel atwhichwereject the
nullhypothesis,H0,giventheobservedvalueoftstatistic.
ARejectionRule
Whatisthecorrect significancelevel?
Since|t|<c,dowerejectH0?
27
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Eviews:RegressGPAonACT
Example:TheeffectofACTonGPA
Dependent Variable: GPA
Method: Least Squares
=0.5681+0.1021ACT
(s.e.)(0.92842)(0.03569)
{tstat}{0.611933}{2.863324}
pvalue[0.563][0.0287]
n=8;R2=.577424
Sample: 1 8
Included observations: 8
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EconomicSignificanceversusStatisticalSignificance
Statisticalsignificancereferstothesizeof
Economicsignificancereferstothesizeof .
Notes
(1)Smallsamplewithaslargepvalueas0.20couldbesatisfactory.
(2)Largesamplewithlargepvaluemaysuggestreinvestigation.
(3)Alargecoefficientwithsmallpvaluebutwrongsignisaproblem.
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0.568132
Std. Error
0.928421
t-Statistic
0.611933
Prob.
0.563
ACT
0.102198
0.035692
2.863324
0.0287
R-squared
0.577424
3.2125
Adjusted R-squared
0.506994
S.E. of regression
0.269173
0.425395
0.434725
Schwarz criterion
0.445255
0.383359
Log likelihood
0.298422
F-statistic
8.198622
Durbin-Watson stat
2.268603
Prob(F-statistic)
0.028677
IV. EV&Var
1. The Simple Regression Model . Quantitative Methods of Economic Analysis . 2949605 . Chairat Aemkulwat
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Sowhichsignificanceismoreimportant?
Coefficient
Example:Hourlywagemodel
Economicsignificance:alarge
Statisticalsignificance:a large
Variable
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Iseachoftheexplanatoryvariablesstatisticallysignificantat
the5%significancelevel?
Howabouttheeconomicsignificance?
31
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III.ConfidenceIntervals
Example:Find95%CIforthereturnoneducation:
=0.092;s.e( )=0.0073andc=1.960
The95%confidenceintervalis(7.8%,10.6%)
Confidenceintervalsarealsocalledintervalestimates.
Giventhreequantities, ,se( )andc,a 95%confidence
intervalisgivenby
c*s.e.( )
Pr(lowerbound j upperbound)=0.95
90%CI:
95%CI:
99%CI:
Derivation:
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IV.TestingHypothesisaboutaSingle
LinearCombinationofj
Ifrandomsampleswereobtainedoverandoveragain,
withupperandlowerboundscomputedovertime,the
unknownjwouldliewithintheintervalfor95%ofthe
samples.
Forsmallsamples,theexactcriticalvalue(c)shouldbe
checked.
IV. Linear Combination V. F-Test
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Considerthemodel
log(wage)=0 +1jc +2univ +3exper +u
jc
univ
RuleofThumb: Forlargesamples,a95%CIwould
approximatelyequalto
2*s.e.( )
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0.0921.645(.0073)
0.0921.960(.0073)
0.092 2.576(.0073)
33
Interpretation
Forotherlevelsofconfidenceintervals,
35
:#ofyearsattendingatwoyearcollege.
:#ofyearsattendingafouryearcollege.
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Testwhetherayearatajuniorcollegewortha
yearatafouryearcollege
Hypothesis
Hypothesis
H0 :1 =2
H1 :1 <2
Twomethodsoffindingtstatistic:
1)findse( )directly.
2)tricktofindse( )fromEviews.
Similarly,
H0 :1 2=0
H1 :1 2<0]
Method(1)
Needtoknow , ,andse(
).
Acaseofttest:
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Method(2)
Define:
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Example:tricktotestH0:1=0
1 =1 2
1 =1 +2(*)
thenplug(*) into
log(wage)=0 +1jc +2univ +3exper +u
log(wage)=0 +1jc +2(univ+jc) +3exper +u
se( )
Findse( )whenestimatingtheaboveequation
Canwerejectthenullhypothesisatthe10%significancelevel?
Comparetotheoriginalequation
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MultipleRestrictions
V.TestingMultipleLinearRestrictions
Considersalarymodelofbaseballplayers
salary
=1993totalsalary(dollars)
years
=yearsinleague(years)
gamesyr
=averagegamesplayedperyear(game)
bavg
=battingaverage(strikes)
hrunsyr
=homerunsperyear(runs)
rbisyr
=runsbattedperyear(runs)
MultipleRestrictions:
H0 :3 =0,4 =0,5 =0
H1 :H0 isnottrue
Thisiscalledajointormultiplehypothesistest.
AjointhypothesisisdonebyFtest,i.e.,comparingSSR inthemodels
withandwithoutvariablesinquestion bavg,hrunsyr andrbisyr.
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SSR:SumofSquaredResiduals
42
Restrictedvs.Unrestricted
Themodelwithallvariables unrestrictedmodel:
log()= + years + gamesyr + bavg + hrunsyr + rbisyr
SSRu =183.186,Ru2 =0.6278,n=353
Themodelwithoutthreevariables restrictedmodel:
log()= + years + gamesyr
SSRR =198.391,RR2 =0.5971,n=353
Question :IstheincreaseinSSRlargeenoughtowarranttherejectionofH0 :3 =
4 =5 =0whenmovingfromtheunrestrictedtorestrictedmodel?
RejectionRule: F>C
c:the95th percentileintheFq,nk1 distribution(=5%)
IfthenullH0 isrejected,thenvariablesarejointlysignificant.
Fstatistic:
(droppingbavg,hrunsyr,rbisyr)
n=353
F=[(198.3183.1)/3]/(183.1/347)=9.55
=5%
=1%
q=numeratordegreesoffreedom=dfR dfU
nk1=denominatordegreesoffreedom=dfU
I. Distribution II. T-test
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c=2.60
c=3.78
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fromtheF3,347 dist.
fromtheF3,347 dist.
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R2formoftheFStatistic
The F statistic
f(F)
fail to reject
Reject H0 at
significance level
if F > c
F=[(.6278.5971)/3]/[(1.6278)/347]=9.55
UsingEviews:Intheestimationoutput window,
chooseView/CoefficientTests/RedundantVariables.Then,
typeinthevariablethatisredundant,bavg hrunsyr rbisyr and
clickOK
reject
0
I. Distribution II. T-test
2.66
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Example:H0 :3 =4 =5 =0
RR2 =0.5971
SSRR =198.311
SSRU =183.186;n=353
Ru2 =0.6278
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4. Multiple Regression Analysis: Inference . Quantitative Methods of Economic Analysis . 2949605 . Chairat Aemkulwat
Estimation output
Coefficient
Std. Error
t-Statistic
Prob.
11.19242
0.288823
38.75184
YEARS
0.068863
0.012115
5.684295
GAMESYR
0.012552
0.002647
4.742442
BAVG
0.000979
0.001104
0.886811
0.3758
HRUNSYR
0.014429
0.016057
0.898642
0.3695
RBISYR
0.010766
0.007175
1.500458
0.1344
R-squared
Adjusted R-squared
0.62244
1.182466
2.215907
183.1863
Schwarz criterion
2.281626
F-statistic
117.0603
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Coefficient
13.49218
Prob(F-statistic)
0.000004
Variable
1.26539
0.000004
Probability
0.726577
Durbin-Watson stat
Probability
28.00528
0.627803
-385.1076
9.550251
S.E. of regression
Log likelihood
F-statistic
47
Std. Error
t-Statistic
Prob.
11.2238
0.108312
103.6247
YEARS
0.071318
0.012505
5.703153
GAMESYR
0.020174
0.001343
15.02341
R-squared
0.597072
13.49218
Adjusted R-squared
0.594769
1.182466
S.E. of regression
0.752731
2.278245
198.3115
Log likelihood
-399.11
Durbin-Watson stat
1.193944
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Schwarz criterion
2.311105
F-statistic
259.3204
Prob(F-statistic)
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RelationshipBetweenFandtstatistics
F1,nk1=t2nk1
PvalueforFtests
Apvalueisthesmallestsignificancelevelatwhichthenull
hypothesiswouldberejected.
pvalue=P(Fv >F)
F:actualvalueoftheteststatistic
Fv :Frandomvariable
Example:(Salarymodelofbaseballplayers)
H0 :5=0(parameterofrbisyr)
Whatarerestrictedandunrestrictedequations?
Interpretation:
(1) Fstat=9.550251pvalue=.000004
(2) Multicollinearity
R23 =0.159512
(bavg)
2
(hrunsyr)
R 4 =.826496
R25 =.895780
(rbisyr)
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t=1.50
F=2.25
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2.251375
Probability
0.134405
2.282906
Probability
0.130807
Coefficient
Std. Error
t-Statistic
Prob.
11.02091
0.265719
41.4758
YEARS
0.067732
0.012113
5.591799
GAMESYR
0.015759
0.001564
10.0789
BAVG
0.001419
0.001066
1.330995
0.1841
HRUNSYR
0.035943
0.007241
4.963996
R-squared
0.625388
13.49218
Adjusted R-squared
0.621082
1.182466
S.E. of regression
0.727882
2.216709
184.3749
Schwarz criterion
2.271474
F-statistic
145.2403
Log likelihood
-386.2491
Durbin-Watson stat
1.244041
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Prob(F-statistic)
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OverallSignificanceofaRegression
H0 :1 =2 ==k = 0
Sample: 1 353
(pvalue=0.1344)
(pvalue=0.1344)
F1,nk1=t2nk1
2.25=(1.50)2
4. Multiple Regression Analysis: Inference . Quantitative Methods of Economic Analysis . 2949605 . Chairat Aemkulwat
Fstatisticcanbeusedtotestsignificanceofasinglevariable.
Unrestrictedmodel
y=0 +1x1 +2x2++kxk +u
findSSRu,Ru2
Restrictedmodel
y=0 +u
R2R=0sincethereisnoxtoexplainy.
Thus,theactualFvalueis
kisthenumberofregressors.
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TestingGeneralLinearRegressions
Considerahedonicpricemodel
Coefficient
Std. Error
t-Statistic
Prob.
11.19242
0.288823
38.75184
YEARS
0.068863
0.012115
5.684295
GAMESYR
0.012552
0.002647
4.742442
BAVG
0.000979
0.001104
0.886811
0.3758
HRUNSYR
0.014429
0.016057
0.898642
0.3695
RBISYR
0.010766
0.007175
1.500458
0.1344
R-squared
Adjusted R-squared
0.627803
13.49218
0.62244
1.182466
S.E. of regression
0.726577
2.215907
183.1863
Schwarz criterion
2.281626
Log likelihood
Durbin-Watson stat
-385.1076
1.26539
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F-statistic
price
assess
lotsize
sqrft
bdrms
=houseprice
=assessedhousingvalue
=sizeofthelot(feet)
=squarefootage
=numberofbedrooms
Wewouldliketotestwhethertheassessedhousingpriceisarational
valuation.
H0 :1=1,2=0,3=0,4=0
117.0603
Prob(F-statistic)
0
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FTestandSSRs
H0 :1=1,2=0,3=0,4=0
Coefficient
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Prob.
0.263744
0.569665
0.462982
0.6446
1.043065
0.151446
6.887373
LLOTSIZE
0.007438
0.038561
0.192886
0.8475
LSQRFT
-0.10324
0.13843
-0.745779
0.4579
BDRMS
0.033839
0.022098
1.531301
0.1295
0.772809
Adjusted R-squared
t-Statistic
LASSESS
R-squared
InEviews:0=c(1); =c(2);
UsingEviews:Intheestimationoutput window,
chooseView/CoefficientTests/Wald:CoefficientRestrictions. Then,
typeinnullhypothesis,c(2)=1,c(3)=0,c(4)=0,c(5) and
clickOK
Std. Error
5.63318
0.303573
S.E. of regression
0.148142
-0.92615
1.821529
Schwarz criterion
-0.78539
Log likelihood
45.75048
F-statistic
70.58276
Durbin-Watson stat
2.048495
Prob(F-statistic)
0.76186
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Using Eviews:
In the estimation output window,
choose View/Coefficient Tests/Wald: Coefficient Restrictions Then,
type in null hypothesis, c(2)=1, c(3)=0, c(4)=0, c(5) and
click OK
VI.MLEstimationandLRStatistic
Wald Test:
Equation: Untitled
Null Hypothesis:
Assumethattheerrorisnormallydistributedwithmeanzeroand
variance2,i.e.,u N(0,2).
Giventhekvariablemodel,
y=0 +1x1 +2x2 ++kxk +u
ThevariableyisalsonormallydistributedwithmeanE(y|x)and
variance2.
C(2)=1
C(3)=0
C(4)=0
C(5)=0
F-statistic
0.667772
Probability
0.61616
Chi-square
2.671087
Probability
0.614283
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LogLikelihoodFunction
PDFandLikelihoodFunction
Thedensityfunctionofanormallydistributedvariablewithgiven
meanandvarianceis
Theloglikelihoodfunctionis
Wecanobtainthefirstorderconditions(k+2)similartothose(k+1)of
themethodofleastsquares.Thus,theMLestimators arethesame
asLSestimators .
Themethodofmaximumlikelihoodconsistsinestimatingtheunknown
parametersinsuchamannerthattheprobabilityofobservingthegiven
ysisashighaspossible.
Thelikelihoodfunctionisthejointdensityofthenvalues.
LF
=f(y1,y2,,ynE(y|x),2)
= [f(yi)]=f(y1)f(y2) f(yn)
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BaseballExample
TestofMultipleRestrictions
Wecanuselog(LF)totestformultiplerestrictions.Giventhebaseball
equation.
Themodelwithallvariables unrestrictedmodel:
log()= + years + gamesyr + bavg + hrunsyr + rbisyr
loglikelihood(Lur)=385.1076,Ru2 =0.6278,n=353
Themodelwithoutthreevariables restrictedmodel:
log( )= + years + gamesyr
loglikelihood(Lr) =399.11,RR2 =0.5971,n=353
LR=2(LurLr) 2(3)
=2(385.1076+399.11)=28.0048
Thecriticalvalueofthe99thpercentileinthechisquaredistributionwith
3degreesoffreedomisc=11.34.Thus,werejectthenullhypothesisasin
FTestandLMTest.
Thejointnullhypothesisis
H0:3 =0,4 =0,5 =0
ThelikelihoodratiostatisticisLR=2(LurLr) 2q
where
Lur istheloglikelihoodvaluefortheunrestrictedmodel,
Lr istheloglikelihoodvaluefortherestrictedmodel.
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Estimation output
F-statistic
9.550251
Probability
0.000004
28.00528
Probability
0.000004
Variable
Test Equation:
Coefficient
Std. Error
t-Statistic
Prob.
11.19242
0.288823
38.75184
YEARS
0.068863
0.012115
5.684295
GAMESYR
0.012552
0.002647
4.742442
Variable
BAVG
0.000979
0.001104
0.886811
0.3758
HRUNSYR
RBISYR
0.014429
0.010766
R-squared
Adjusted R-squared
S.E. of regression
Log likelihood
I. Distribution II. T-test
Prob.
103.6247
0.3695
YEARS
0.071318
0.012505
5.703153
0.1344
GAMESYR
0.020174
0.001343
15.02341
R-squared
0.597072
13.49218
13.49218
1.182466
Adjusted R-squared
0.594769
1.182466
0.726577
2.215907
S.E. of regression
0.752731
2.278245
Schwarz criterion
2.281626
198.3115
Schwarz criterion
2.311105
F-statistic
117.0603
Log likelihood
-399.11
F-statistic
259.3204
Durbin-Watson stat
1.193944
Prob(F-statistic)
1.26539
III. CI
1.500458
t-Statistic
0.108312
0.62244
-385.1076
Durbin-Watson stat
0.007175
0.898642
Std. Error
11.2238
0.627803
183.1863
0.016057
Coefficient
Prob(F-statistic)
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Whathavewelearned?
Eviews
1)Ftest:Wald/CoefficientRestriction
2)Ftest:RedundantVariables
3)Ftest:OverallSignificanceofvariables
4)pvaluesandtstatistics
5)LogLikelihoodRatio(LR)Test
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Sample: 1 526
Included observations: 526
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RecapofMRA:Inference
Sampling Distribution of the OLS Estimation
Testing Hypothesis about a Single Population Parameter
t Test
Confidence Interval
Testing Hypothesis About a Single Linear Combination of
the Parameters
Testing Multiple Linear Restrictions : F-Test
ML Estimation and LR Statistic
III. CI
Coefficient
Std. Error
t-Statistic
Prob.
-2.87274
0.728964
-3.940844
0.0001
EDUC
0.598965
0.051284
11.67948
0
0.0645
EXPER
0.02234
0.012057
1.852849
TENURE
0.169269
0.021645
7.820361
R-squared
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Variable
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0.306422
5.896103
3.693086
Adjusted R-squared
0.302436
S.E. of regression
3.084476
5.098216
4966.303
Schwarz criterion
5.130652
Log likelihood
-1336.83
F-statistic
76.87317
Durbin-Watson stat
1.791222
Prob(F-statistic)
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