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Econometrics - Theory and Applications with EViews_ 2005 [Vogelvang].pdf

# Econometrics - Theory and Applications with EViews_ 2005 [Vogelvang].pdf

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We wiU consider some necessary statistical topics as preparatory work before interval
estimates can be computed and restrictions can be tested. A more detailed discussion and
proofs regarding the issues in this section can be found in the statistical literature or in a
statistical chapter in a more theoretical econometrics book. Such proofs concern a number
of X2-distributions that are needed to obtain the Student t-and Fisher F-distributions for
testing restrictions on parameters.
First, the definitions of the Student t-and Fisher F -distribution must be memorised,
because these definitions will be applied to derive the test statistics.

• The definition of the Student t-distribution with r degrees of freedom is as follows.
If x ~ N(O, 1), v2

~ x2

(r), and x and v are independently distributed, then the
following quotient has a Student's t-distribution with ,. degrees of freedom:

X

.Jv2 /r ~ t(,·),

(5.4)

or

(x/v) .jT ~ t(r).

-

Survey of some useful distributions and test principles

93

• The definition of the Fisher F-distribution with p and q degrees of freedom is as
follows. If X2 ~ X2(p), y2 ~ X2(q), and X2 and y2 are independently distributed,
then the following quotient has a Fisher F -distribution with p and q degrees of
freedom:

.

(5.5)

From these definitions, it is clear that we will need X2

normally distributed OLS estimator, for deriving t-and F-distributions. Therefore, a helpful
summary of four useful X2 distributions, which will be used to derive the test statistics, is
given below. (See, for example, Johnston and DiNardo (1997: pp.493-495).)

• First, consider a variable Xi with n independent observations from a standard normal
distribution. Use the notation (4.4) from Section 4.2:

x ~ N (O,In).

(nx I)

n

Then, by definition, the sum of squares L x; has a x2(n) distribution:

i=l

n

XiX = L x; ~ x2(n).

1=1

(5.6)

• Secondly. consider a variable Xi with n observations that is normally independently

distributed with mean 0 and variance 0"2 Then the (n xl) vector x is distributed

as:

n

Standardise the Xi, and the sum of squares L (Xii 0")2 has again a X2 (n) distribution:

i=1

(5.7)

Now write (x'x) /a2

in a differem way, in matrix notation:

1 I

I (2 )-'

2XX =X a In x,

0"

(5.8)

and see the benefit of this notation in the following situation.

• Thirdly, consider an (n x 1) vector X, containing n observations on the variable Xi,

which is normally distributed with zero mean and an (n x n) covariance matrix 11:

x ~ N (0, 11).

(nx 1)

94

Chapter 5. Testing the Deterministic Assumptions

It can be shown that:

(5.9)

See the analogy with the notation in (5.8).

• Finally. we consider the following situation. We have a variable Xi with n observa-

tions that is normally independently distributed with mean 0 and variance ,,2:

x ~ N (0, ,,2In) .

(71)(1)

Further we have an (n x n) idempotent matrix A with rank r < n. Then the fol-
lowing X2-distribution can be derived:

(5.10)

The two X2

-distributions (5.9) and (5.10) will be used in the following sections of this

chapter.

Test principles

Three types of test principles are distinguished in the statistical literature: 'Likelihood ratio
tests', 'Wald-tests' and 'Lagrange multiplier tests'. These types will be encountered in fol-
lowing chapters. (See, for example, Section 4.6 in Stewart and Gill (1998), for a compact dis-
cussion on this topic.) Forexarnple, a frequently used test concerns the null hypothesis that an
explanatory variable (Xtk) has no influence on the dependent variable (Y,), in other words
Xtk does not belong to the model, which is formulated as Ho : 13k = O. If this null hypothesis
has not been rejected the model can be re-estimated without Xtk. Then we have an esti-
mated unrestricted model and an estimated restricted model. The three test principles differ
in which model is used to test the restriction. A summary of the test principle is given below.

• Likelihood ratio (LR)-tests

The LR-test can be app~ed after both the unrestricted and restricted models have
been estimated; the restricted model has to be 'nested' in the unrestricted model,
which means that the restricted model is a special case of the unrestricted model.
For example, suppose that 9 linear restrictions have been imposed. The maximum

-

-

of the log-likelihood function of the unrestricted model is L(O), and L(OR) is the
maximum of the log-~kelihood function of the restricted model. The likelihood

-

-

ratio>. is defined as L(OR)! L(O), and the test statistic and its distribution (for large
samples) under the null hypothesis are:

The LR-test statistic can easily be computed because the maximum value of the
likelihood function is always printed in the regression output. In EViews an LR-test

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