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Econometrics 2
Multiple Regression Models : Examples
Econometrics 3
Assumptions of the Multiple Linear Regression
Model
for i = 1,2,...,n
Econometrics 4
Assumptions of the Multiple Linear Regression
Model
u is a random variable distributed with
Econometrics 5
Assumptions of the Multiple Linear Regression
Model
E(uiuj ) = 0 for i j
Econometrics 6
Assumptions of the Multiple Linear Regression
Model
Econometrics 7
Multiple Regression Model in Matrix Form
Y1 1 X 21 X 31 … X k 1 u1
Y 1 X X 32 … X k 2 u
Y 2 X 22 U 2
⋮ ⋮ ⋮ ⋮ ⋮ ⋮ ⋮
Yn 1 X 2n X 3 n … X kn un
1
2
⋮
k
Y X U
Econometrics 9
Least Squares Estimators
Econometrics 10
Least Squares Estimators – Matrix Notation
1
ˆ X T X X TY
Econometrics 11
Statistical Properties of Least Squares
Estimators – Matrix Notation
1 1
ˆ X T X X Y X X
T T
U
E ( ˆ )
Econometrics 12
Statistical Properties of Least Squares Estimators
– Matrix Notation
X X
1
Var ( ˆ ) 2
u
T
X X
1
Assumption 5 ˆ ∼ N ( , 2
u
T
)
2
Or is unknown !
1
Var ˆ ˆu2 X T X
and s.e.( ˆ j ) ˆu a jj
Econometrics 13
Goodness of Fit
The coefficient of multiple determination is defined as
the ratio of the Explained or Regression Sum of Squares
to the Total Sum of Squares:
Ŷ Y
2
R 2
ESS
Y Y
2
TSS
RSS
Or we could use R 1
2
TSS
Note: this is no longer the square of a simple correlation
coefficient.
Econometrics 14
Adjusted R squared (R bar squared)
RSS
Whereas R 1
2
TSS
RSS / n k
R 1
2
TSS / n 1
Econometrics 16
More on R bar squared
A bit of simple algbra shows the relationship beween R2
and R 2
n 1
2
R 1 1 R
2
n k
Econometrics 17
Tests of Significance of the Individual Parameter
Estimates
Under the classical assumptions for any particular
parameter βj the statistic
ˆ j j
has a tn-k distribution
s.e.( ˆ j )
Econometrics 18
Tests of Significance of the Individual Parameter
Estimates
2
As before an estimate of u
is required.
ˆ
2
ˆ
u 2
RSS
u
nk nk
Econometrics 19
Testing the Overall Significance of the Regression.
Analysis of Variance (F-test)
H0: 2=…=k=0
H1: not all the parameters are 0
( ˆ
y y )2
/ k 1 ESS / k 1
∼ Fk 1,n k
uˆ / n k
2
RSS / n k
Econometrics 20
R squared and the F-value
R2 / k 1
Fcal ∼ Fk 1,n k
(1 R ) / n k
2
Econometrics 21
Practical illustrations
Econometrics 22
Practical illustrations
Econometrics 23