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Confidence Interval
&
Hypothesis Testing
4.2
(Computing Tutorial #2: Application of Phillips Curve Theory for the Case of Hong Kong)
EMU, Econometrics I, M. Balclar
1
1.
Unbiased
efficient
2.
3.
2
( 1) = 1 (2)=
X ^2
2
1
n x
2
^
var(2)
=
^2 =
2
2
x
2
Min. Variance var( ) =
^
1
4.4
1 ~ N (1 , 2 )
1
~ N (2 , 2 )
2
2
( n - 2 ) 2 x 2
~ (n - 2 )
2
4.5
f ( 2 )
Density
Estimated ^2
falls in area
true
2 -
2 +
4.6
0.99
0.95
0.90
0.01
0.05
0.10
4.7
By assumption:
2
(
u i ~ N O, u )
Var(u) =u2
~ N (1 , 2 )
1
E(u) = 0
2
2
xi
2
=
2
n x i
2 ~ N (2 , )
=
xi2
(cont.) 4.8
f ( 2 )
Actual estimated 2
could fall into
these regions
E( 2 )= 2
2
EMU, Econometrics I, M. Balclar
i (cont.)
4.9
2 - 2
Z=
se ( 2 )
EMU, Econometrics I, M. Balclar
4.10
(cont.)
N (0 ,1 )
2
4.11
(cont.)
For example:
Accept
region
4.12
(cont.)
Pr (- 1 . 96 Z 1 . 96 ) = 0 . 95
2 - 2
Pr - 1 . 96
1 . 96 = 0 . 95
Se ( 2 )
95% confidence interval:
2 - 2
- 1 . 96
1 . 96
Se ( 2 )
EMU, Econometrics I, M. Balclar
4.13
(cont.)
2 - 1.96* se ( 2) 2 2 + 1.96 * se ( 2 )
2 1.96* se ( 2)
RSS
u
i
2
=
n- 2
Then, instead of normal standard distribution,
t-distribution is used.
EMU, Econometrics I, M. Balclar
4.14
(cont.)
2 - 2
t=
se ( 2)
estimated
true
parameter
t=
standard error of estimator
t=
( 2 - 2 )
x2
SEE
4.15
(cont.)
2 - 2
t=
se ( 2 )
where
t=
se ( 2 )=
(2 - 2)
a specified value
2
^2
x2
x2
EMU, Econometrics I, M. Balclar
4.16
Pr
t , n- 2 t t, n- 2 = 1 -
2
where
t
2
4.17
(cont.)
c
2 - 2
c
t 0 .05 , n - 2 = 0 . 90
Pr - t 0 .05 , n - 2
(
)
se
2
Pr( -tc0.025, n-2 (^2- 2)/se(^2) tc0.025, n-2 ) = 0.95
Rearranging,
c
c
= 0 .90
EMU, Econometrics I, M. Balclar
4.18
2 t 0.05 , n - 2 * se ( 2)
c
t 0.05 , n - 2
2 & se ( 2)
Check it from
estimated result
tc
2
0.025, n-2
se( 2)
4.19
H0: 2= 0
H1: 2 0
0.5091 - 0
t=
0.0357
se(^2)
^
SEE=
RSS
EMU, Econometrics I, M. Balclar
4.20
2 t
, 2 n 2
se( 2)
0 .5091 t
c
0 .025 , 8
( 0 .0357 )
4.21
0 .5091 t 0.05
,8
( 0 .0357 )
4.22
H0: 2= 0
H1: 2 0
t=
-0.395
-0
0.0332
se(^2)
^
SEE=
RSS
EMU, Econometrics I, M. Balclar
4.23
2.
3.
4.
5.
6.
7.
8.
alternative hypotheses.
Determine the appropriate statistical test
and sampling distribution.
Specify the Type I error rate ().
State the decision rule.
Gather sample data (estimate the model=.
Calculate the value of the test statistic.
State the statistical conclusion.
Make decision.
EMU, Econometrics I, M. Balclar
Rejection Region
Rejection Region
Critical Value
Type I Error
Type II Error
Null True
Null False
Fail to
reject null
Correct
Decision
Type II error
()
Reject null
Type I error
()
Correct Decision
Test-Significance Approach:
One-tailed T-test decision rule
Step 1:
H 0 : 2 2 (H 0 : 2 2 )
0
0
(
>
<
H1 : 2 H1 : 2 )
0
Step 2:
0
2 2
t =
se ( 2)
4.31
State the
hypothesis
Computed value
c
, n- 2
compare tc and t
EMU, Econometrics I, M. Balclar
==> reject H0
==> not reject H0
Right-tail
tc < t
(If t > -
Right-tail
left-tail
t < -tc 0
4.32
Left-tail
EMU, Econometrics I, M. Balclar
4.33
Two-Tailed T-test
1.
0
=
H 0 : 2
2
H1 : 2
2
0
2.
2 - 2
Compute t =
se ( 2 )
3.
4.34
Compare t and
Decision Rule:
If
reject H0 region
2 - t c
2, n 2
reject H0 region
se ( 2 )
c
2 + t
2
*
, n- 2
se ( 2 )
4.35
One-Tailed t-test
We also could postulate that:
1.
Compute:
H 0 : 2 0 .3
H1 : 2 > 0.3
- 02
t= 2
2)
se (
- 0 .3 0 .2091
0
.
5091
=
= 5.857
t=
0 .0357
0 . 0357
EMU, Econometrics I, M. Balclar
4.36
3.
= 0.05
reject H 0
EMU, Econometrics I, M. Balclar
4.37
0
2
0
<
H1 : 2
2
If t < - tc
, df
=> reject H0
left-tail
^*- tc se()
^
EMU, Econometrics I, M. Balclar
4.38
Two-Tailed t-test
Suppose we postulate that
H 0 : 2 = 0.3
H1 : 2 0.3
4.39
2 - 02 0 .5091 - 0 . 3 0 .2091
=
=
= 5.857
t=
se ( 2 )
0 .0357
0 .0357
tc0.025, 8 = 2.306
==> reject H0
It means the estimated 2 is not equal to 0.3
EMU, Econometrics I, M. Balclar
Tests about
4.40
4.41
4.42
Accepting or Rejecting
4.43
4.44
4.45
Test Statistic:
= 0.05, se(^2)=0.0357
n = 10, df=8
Critical Value: 2.306
Reject
.025
.025
-2.306
2.306
5.857
t=(0.5091-0.3)/0.0357
= 5.857
Decision:
Reject at = 0.05.
Conclusion:
Insufficient Evidence that
2 is equal to 0.3.
EMU, Econometrics I, M. Balclar
4.46
p-value solution
(get the p-value from my t table at the web site)
/2= 0.025
Reject
Reject
p-value=0.0005
t
2.306 5.857
Test Statistic 5.857 is in the Reject Region
0.3
4.47
4.48
4.49
F0.05(1,8)=5.32 Reject H0
4.50