Normality test

Let's delve into the concept of normality tests in econometrics, with a focus on the Jarque-
Bera test.
Normality Testing and the Jarque-Bera Test
1. **Understanding Normality**
In statistical analysis, understanding the underlying distribution of data is crucial for drawing
meaningful conclusions and making accurate predictions. The normal distribution (also
known as the Gaussian distribution) is a symmetrical bell-shaped curve where most data
points cluster around the mean. Many statistical methods assume that the data follows a
normal distribution. However, assuming normality when the data is not normally distributed
can lead to incorrect conclusions and predictions.
2. **The Jarque-Bera Test**
The Jarque-Bera test is a statistical test used to determine whether a given dataset follows a
normal distribution. It was first introduced by Carlos Jarque and Anil Bera in 1980 and has
since become a standard method in statistical analysis. Specifically, the test assesses whether
the skewness and kurtosis of the data match what would be expected under a normal
distribution.
Here's how the Jarque-Bera test works:
 Skewness: Skewness measures the asymmetry of the data distribution. A normal
distribution has a skewness of 0. If the data is skewed (positively or negatively), the
skewness value will deviate from 0.
 Kurtosis: Kurtosis quantifies the "tailedness" of the distribution. A normal
distribution has a kurtosis of 3. Excess kurtosis (greater or lesser than 3) indicates heavier
or lighter tails, respectively.
3. **Test Procedure**
1. Calculate the sample skewness and kurtosis for the dataset.
2. Compare these observed values with what would be expected under a normal
distribution.
3. The Jarque-Bera test statistic is based on the difference between the sample skewness
and kurtosis and their expected values.
4. If the test statistic is significantly different from zero, it suggests that the data does not
follow a normal distribution.
4. **Interpretation**
 If the Jarque-Bera test statistic is large, it signals that the data significantly deviates
from normality.
 If the test statistic is close to zero, it implies that the data is approximately normally
distributed.
5. **Strengths and Limitations**
 Strengths: The Jarque-Bera test is a powerful tool for assessing normality, especially
when dealing with large datasets.
 Limitations: It assumes that the data is normally distributed, which may not always
hold in practice. Additionally, it is sensitive to departures from normality.
6. **Practical Applications**
 The Jarque-Bera test is commonly used in hypothesis testing, model diagnostics, and
assessing normality in econometric datasets.
Remember that while the Jarque-Bera test provides valuable insights, it's essential to consider
other diagnostic tools and context when interpreting results. Understanding the mathematical
basis of this test equips you with the skills to use it effectively in your econometric analyses 1 2
Approaches to Hypothesis Testing

Steps to Conduct a Hypothesis Test Using p-values:

1. Identify the null hypothesis and the alternative hypothesis (and decide which is the
claim).
2. Ensure any necessary assumptions are met for the test to be conducted.
3. Find the test statistic.
4. Find the p-value associated with the test statistic as it relates to the alternative
hypothesis.
5. Compare the p-value with the significance level, α. If p<α, conclude that the null
hypothesis should be rejected based on what we saw. If not, conclude that we fail to
reject the null hypothesis as a result of what we saw.
6. Make an inference.

Steps to Conduct a Hypothesis Test Using Critical Values:

1. Identify the null hypothesis and the alternative hypothesis (and decide which is the
claim).
2. Ensure any necessary assumptions are met for the test to be conducted.
3. Find the test statistic.
4. Find the critical values associated with the significance level, α, and the alternative
hypothesis to establish the rejection region in the distribution.
5. If the test statistic falls in the rejection region, conclude that the null hypothesis
should be rejected based on what we saw. If not, conclude that we fail to reject the
null hypothesis as a result of what we saw.
6. Make an inference.

Steps to Conduct a Hypothesis Test Using a Confidence Interval:

1. Identify the null hypothesis and the alternative hypothesis (and decide which is the
claim).
2. Ensure any necessary assumptions are met for the test to be conducted.
3. Construct a confidence interval with a confidence level of (1−α)
4. If the hypothesized population parameter falls outside of the confidence interval,
conclude that the null hypothesis should be rejected based on what we saw. If it falls
within the confidence interval, conclude that we fail to reject the null hypothesis as a
result of what we saw.
5. Make an inference.