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Regression with a Single Regressor: Hypothesis Tests

and Confidence Intervals

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Regression Coefficient Confidence Internals


The confidence interval for the regression coefficient, B1, is calculated as:

b1 (tc sb1 ), or [b1 - (tc sb1 ) B1 b1 (tc sb1 )]

Sb1: The standard error of the regression coefficient

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Example
Professors Note: It is highly unlikely you will have to calculate sb1 on the exam . It is
included in the output of all statistical software packages and should be given to you if
you need it .
Example: Calculating the confidence interval for a regression coefficient
The estimated slope coefficient, B1, from WPO regression is 0.64 with a standard error
equal to 0.26. Assuming that the sample had 36 observations, calculate the 95%
confidence interval for B1.
Answer:
The confidence interval for b1 is:

b1 (tc sb1 ), or [b1 (tc sb1 ) B1 b1 (tc sb1 )]

The critical two-tail t-value are 2.03 (from the t-table with n-2=34 degrees of
freedom ).We can compute the 95% confidence interval as :
0.64 (2.03)(0.26)=0.64 0.53=0.11 to 1.17
Because this confidence interval does not include zero ,we can conclude that the
slope coefficient is significantly different from zero .
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Regression Coefficient Hypothesis Testing

H0: B1=0 versus Ha: B10

b1 -B1 b1
t=

t (n-2)
s b1
s b1
The decision rule for tests of significance for regression coefficients is:

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Example
Example: Hypothesis test for significance of regression coefficients
The estimated slope coefficient for WPO is 0.64 with a standard error equal to
0.26. Assuming that the sample has 36 observations, determine if the estimated
slope coefficient is significantly different than zero at a 5% level of significance.
Answer:

b1 B1 0.64 0
The calculated test statistics is t

2.46
sb1
0.26
The critical two-tailed t-values are 2.03 (from the t-table with df = 36-2 = 34).

Because t > t critical (i.e., 2.46 > 2.03), we reject the null hypothesis and conclude
that the slope is different from zero. Note that the t-test and the confidence
interval lead to the same conclusion to reject the null hypothesis and conclude
that the slope coefficient is statistically significant.

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Answer: B

The R2 of the regression is calculated as ESS/TSS = (92.648/117.160) = 0.79,


which means that the variation in industry returns explains 79% of the
variation in the stock return. By taking the square root of R2, we can calculate
that the correlation coefficient () = 0.889.

The t-statistic for the industry return coefficient is 1.91/0.31 = 6.13, which is
sufficiently large enough for the coefficient to be significant at the 99%
confidence interval.

Since we have the regression coefficient and intercept, we know that the
regression equation is Rstock= l.9X + 2.1%. Plugging in a value of 4% for the
industry return, we get a stock return of 1.9 (4%) + 2.1% = 9.7%.

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201405
QUESTIONS 43 AND 44 REFER TO THE FOLLOWING INFORMATION
A bank analyst run an ordinary least squares regression of the daily returns of the stock
on the daily returns on the S&P 500 index using the last 750 trading days of data. The
regression results are summarized in the following tables:
Predictor

Coefficient

Standard Error

t-statistic

p-value

Constant

0.0561

0.00294

19.09710

0.00000

Return on the S&P 500

1.2054

0.00298

404.25225

0.00000

R2=87.86%
Analysis of Variance
Source

Degree of Freedom

Sum of Squares

Mean Square

Regression

11.43939

11.43939

Residual Error

749

0.05425

0.00007

Total

750

0.44677

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F-statistic

p-value

163419.87971

0.00000

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201405

Answer: D

H0: B1=1.2 versus Ha: B11.2

t=

b1 -B1 1.2054 1.2

1.8121 t critical 2
s b1
0.00298

(fail to reject)

P-value >5%
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Heteroskedasticity ()
Figure 1: Conditional Heteroskedasticity
Y

Low residual
variance

High residual variance

Y b0 b1 X

0
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FRM

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