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Econometrics-I-8

The restricted one used logg logy the calculation is

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The restricted one used logG-logY. The calculation is safe using the sums of squared residuals. ™    32/50
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Part 8: Hypothesis Testing Wald Distance Measure Testing more generally about a single parameter. Sample estimate is bk Hypothesized value is βk How far is βk from bk? If too far, the hypothesis is inconsistent with the sample evidence. Measure distance in standard error units t = (bk - βk)/Estimated vk. If t is “large” (larger than critical value), reject the hypothesis. ™    33/50
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Part 8: Hypothesis Testing The Wald Statistic -1 Most test statistics are Wald distance measures W = (random vector - hypothesized value)'   times         [Variance of difference]                      times        (random vector - hypothesized value)   0 0 -1 0    = Normalized distance measure     = (  -  ) [Var(  -  )] (  -  ) Distributed as chi-squared(J) if (1) the distance is  normally distributed and (2) the variance matrix is the true one, not the esti q q ' q q q q mate. ™    34/50
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Part 8: Hypothesis Testing Test Statistics Forming test statistics: For distance measures use Wald type of distance measure, W = m [Est.Var( m )]-1 m An important relationship between t and F For a single restriction, m = r’b - q . The variance is r ’(Var[ b ]) r The distance measure is m / standard error of m . ™    35/50
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Part 8: Hypothesis Testing Application Time series regression, LogG = 1 + 2logY + 3logPG + 4logPNC + 5logPUC + 6logPPT + 7logPN + 8logPD + 9logPS + Period = 1960 - 1995. Note that all coefficients in the model are elasticities. ™    36/50
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Part 8: Hypothesis Testing Full Model ---------------------------------------------------------------------- Ordinary least squares regression ............ LHS=LG Mean = 5.39299 Standard deviation = .24878 Number of observs. = 36 Model size Parameters = 9 Degrees of freedom = 27 Residuals Sum of squares = .00855 <******* Standard error of e = .01780 <******* Fit R-squared = .99605 <******* Adjusted R-squared = .99488 <******* --------+------------------------------------------------------------- Variable| Coefficient Standard Error t-ratio P[|T|>t] Mean of X --------+------------------------------------------------------------- Constant| -6.95326*** 1.29811 -5.356 .0000 LY| 1.35721*** .14562 9.320 .0000 9.11093 LPG| -.50579*** .06200 -8.158 .0000 .67409 LPNC| -.01654 .19957 -.083 .9346 .44320 LPUC| -.12354* .06568 -1.881 .0708 .66361 LPPT| .11571 .07859 1.472 .1525 .77208 LPN| 1.10125*** .26840 4.103 .0003 .60539 LPD| .92018*** .27018 3.406 .0021 .43343 LPS| -1.09213*** .30812 -3.544 .0015 .68105 --------+------------------------------------------------------------- ™    37/50
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Part 8: Hypothesis Testing Test About One Parameter Is the price of public transportation really relevant? H0 : 6 = 0. Confidence interval: b6 t(.95,27)  Standard error = .11571  2.052(.07859) = .11571  .16127 = (-.045557 ,.27698) Contains 0.0. Do not reject hypothesis Distance measure: (b6 - 0) / sb6 = (.11571 - 0) / .07859 = 1.472 < 2.052. Regression fit if drop? Without LPPT, R-squared= .99573 Compare R2, was .99605, F(1,27) = [(.99605 - .99573)/1]/[(1-.99605)/(36-9)] = 2.187 = 1.4722 (with some rounding difference) ™    38/50
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Part 8: Hypothesis Testing Robust Tests p The Wald test generally will (when properly constructed) be more robust to failures of the narrow model assumptions than the t or F p Reason: Based on “robust” variance estimators and asymptotic results that hold in a wide range of circumstances. p Analysis: Later in the course – after developing asymptotics. ™    39/50
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Part 8: Hypothesis Testing Particular Cases Some particular cases: One coefficient equals a particular value: F = [(b - value) / Standard error of b ]2 = square of familiar t ratio.
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