Inference in Multiple Regression

Econometrics
Section 5
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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.
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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.
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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
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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.
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Testing Hypotheses of Single Parameter
Degrees of Freedom
The amount of data that is left over after the calculations are made.
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Testing Hypotheses of Single Parameter
One-tailed tests
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Testing Hypotheses of Single Parameter
Two-tailed tests
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Testing Hypotheses of Single Parameter
p-values
P (|T| > c

) = p
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Testing Hypotheses of Single Parameter
Condence Intervals

j
c

se(
b

j
)
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Testing Hypotheses of Multiple Parameters
The F Test
The F test is used to test the equality of multiple parameters, simultaneously.
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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
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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
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Testing Hypotheses of Multiple Parameters
The F Test
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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:

rditens =.472 +.321log(sales) +.050profmarg

(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?
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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?
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