Inference Part II Chapter 4

Econ 321 Introduction to Econometrics

Econ 321-Stphanie Lluis

F-test
When testing multiple linear restrictions For exclusion restrictions
What if we are interested in testing whether a group of variables X2, X3, .., Xj has an effect on our dependent variable?

F Distribution
It is the ratio of two chi-squared random variables

Econ 321-Stphanie Lluis

Example: Is salary related to performance?

Major league baseball players salaries log(salary)=0 +1years +2gamesyr +3bavg +4hrunsyr +5rbisyr +u Years in the league Average games played per year Career batting average Measures of performance Home runs per year

Runs batted per year

Hypotheses:
H0: 3=0, 4=0 and 5=0 H1: H0 is not true (at least one of the betas is 0)
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Testing multiple linear restrictions: F test

Estimate an unrestricted and a restricted model is SSRunrestricted much smaller than SSRrestricted that we want to keep xi,x,j,,xk ?
Unrestricted model
y 0 1 x1 ... k q x k q k q 1 x k q 1 .. k x k u

Restricted model

y 0 1 x1 2 x2 ... k q xk q u
q exclusion restrictions H 0 : k q 1 0, k q 2 0,....,

k 0

( SSRr SSRu ) / q F 0 ~ Fq ,n k 1 SSRu /(n k 1)

 Rejection rule

Testing multiple linear restrictions: F-test

If there are enough differences between SSRu and SSRr F > cx Where cx is the critical value for a test with x level of significance

Conclusion: Reject H0 xk-q, ... Xk, are jointly statistically significant

Does not reject the null they are jointly insignificant
Econ 321-Stphanie Lluis 5

Econ 321-Stphanie Lluis

Example: is salary related to performance?

Unrestricted model gives SSRu=183.186 and R2=0.6278 Restricted model
log(salary)=0 +1years +2gamesyr has SSRr=198.311 and R2=0.5971

(198 .311 183 .186 ) / 3 F 9.55 183 .186 /(353 5 1)

c=2.60 so reject H0.

bavg, hrunsyr, rbisyr are jointly statistically significant

Rejection area for testing multiple linear restrictions

If F>c then reject H0

2.60

R2 form of F-test
Numerically easier than using SSR
Use fact that SSRr=SST(1-Rr2) and SSRu=SST(1- Ru2)

( Ru2 Rr2 ) / q F 0 ~ Fq ,nk 1 2 (1 Ru ) /(n k 1)

Previous example:
(0.6278 0.5971 ) / 3 F 9.54 ~ F3,347 (1 0.6278 /(347 )

R2 form of F-test
and if testing overall significance of model
if coefficients on all independent variables are zero

R2 / k F 0 ~ Fk ,n k 1 2 (1 R ) /(n k 1)

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Testing general linear restrictions

Example Run the restricted and unrestricted models
Get the SSRs (R2 wont work in the general case)

Unrestricted model

Restricted model
Econ 321-Stphanie Lluis 11

Testing Single Linear Combination of Parameters

Example (textbook) Jc: # years at a 2-year college Univ: # years at a 4 year-college

Statistic for the test

Rejection rule (based on H1) is t < -c where c is the critical value chosen from the appropriate t distribution

Econ 321-Stphanie Lluis

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Alternative Specification for Test

Define 1 = 1 2 and test

Because 1 = 1 + 2 , replace in the wage equation

Econ 321-Stphanie Lluis

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Alternative Specification for Test

Define explanatory variable totcoll= jc+univ

t=-0.0102/0.0069=-1.48 reject at the 10% but not the 5% level

Econ 321-Stphanie Lluis

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Summary
Tests about a single parameter: use t-student distribution (t statistic) Tests about a single linear combination of parameters: use t-student distribution (t statistic)
possibly need to re-define regression model

Tests about multiple restrictions:

exclusions or overall significance of model : use F distribution (F statistic, also in R2 form) general restrictions: use F distribution (F statistic in SSR form)
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