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Stats Review
Stats Review
Topics
Descriptive Statistics
Mean, Variance
Probability
Union event, joint event
Random Variables
Discrete and Continuous
Distributions, Moments
Statistical Methods
Statistical
Methods
Descriptive
Statistics
Inferential
Statistics
Descriptive Statistics
Involves
Collecting Data
Presenting Data
Characterizing Data
Purpose
Describe Data
90
80
70
60
50
40
30
20
10
0
East
West
North
Inferential Statistics
Involves
Estimation
Hypothesis
Testing
Purpose
Make Decisions
About Population
Characteristics
Population?
Descriptive Statistics
Mean
X =
Xi
i =1
X1 + X2 +
n
+ Xn
Median
Median (Example)
Raw Data: 17 16 21 18 13 16 12 11
Ordered: 11 12 13 16 16 17 18 21
Position: 1 2 3 4 5 6 7 8
Median =
16 + 16
2
= 16
Mode
Measure of Central Tendency
Value That Occurs Most Often
Not Affected by Extreme Values
There May Be Several Modes
Raw Data:
17
16
Ordered:
11
12
21
18
13
16
12
11
13
16
16
17
18
21
Sample Variance
n
S =
(Xi X)
i =1
n 1
2
n - 1 in denominator!
(Use n if population
variance)
(X1 X) + (X2 X) +
n 1
+ (X n X)
S
n
(Xi X )
i =1
n 1
2
(X1 X ) + (X 2 X ) +
n 1
+ (Xn X )
Probability
S ={
Probability of an outcome: proportion of times that the
outcome occurs in the long run
The complement of event A: includes all the events that
are not part of the event A: Symbol A
Event A { }
Complement of A A {
Properties of an Event
1. Mutually Exclusive
Two outcomes that cannot occur
at the same time
2. Collectively Exhaustive
One outcome in sample space
must occur
Experiment: Observe
gender of one person
Joint Events
Joint event: Event that has two or more characteristics
means intersection of event (set) A and event (set) B
Example:
A and B, (AB): Female, Under age 20
Compound Events
Union of event A and event B ( A B ): Total area of the
two circles
A B contains all the outcomes which are part of event
(set) A, part of event (set) B or part of both A and B
means union of event A and event B
= P(A B)
= P(A) + P(B) - P(A B)
A
B
Random variables
Random variable
numerical summary of a random outcome
a function that assigns a numerical value to each simple
event in a sample space
Discrete or continuous random variables
Discrete: only a discrete set of possible values
=> summarized by probability distribution:
list of all possible values of the variables and the
probability that each value will occur.
Continuous: continuum of possible values
=> summarized by the probability density function
(pdf)
2.
3.
4.
0 P(Xi) 1
5.
P(Xi) = 1
Event
Event
B1
B2
Total
A1
A2
Total
P(B1)
P(B2)
Joint Probability
Marginal Probability
Joint distribution:
Marginal distributions:
Conditional distribution:
P( A B1 )
P ( A1 B1 )
P ( B1 )
P ( A2 B1 )
P( B1 )
Red
Black
Total
2/52
2/52
4/52
Non-Ace 24/52
24/52 48/52
26/52
26/52 52/52
Total
P(Red)
P(Ace)
Statistical Independence
When the outcome of one event (B) does not affect the
probability of occurrence of another event (A), the events A
and B are said to be statistically independent.
Example: Toss a coin twice => no causality
Condition for independence:
Two events A and B are statistically independent if and
only if (iff)
P(A | B) = P(A)
P(A B)
P(B)
Covariance
Measures the joint variability of two random variables
N
= (X )(Y )P(X Y )
i
X
i
Y
i, i
XY
i=1
Correlation
Standardized covariance, takes values in [-1, 1]
Does not depend on unit of measurement
Correlation coefficient () formula:
cov( XY ) XY
=
=
X Y
X Y
Covariance and correlation measure only linear dependence!
Example: Cov(X,Y)=0
Does not necessarily imply that y and x are independent.
They may be non-linearly related.
But if X and Y are jointly normally distributed, then they
are independent.
f(X)
Infinite range
68% of the data are within 1 standard
deviation of the mean
Mean, Median,
Mode
Normal Distribution
Probability Density Function
1 X
2
f (X )= 1 e
2
f(X)
=
=
=
=
=
f(X)
B
A
C
X
P (c X d ) =
f ( x)dx ?
c
f(X)
f(X)
X
Thats an infinite number!
Z=
Normal
Distribution
Standardized
Normal Distribution
z = 1
Z = 0
One table!
Standardizing Example
6
.
2
5
Z=
=
= 0.12
10
Normal
Distribution
= 10
= 5 6.2 X
Standardized
Normal Distribution
Z = 1
Z= 0 .12
= E(X) = X f(X) dX
-
Variance
Weighted average squared
deviation about mean
2 = E[ (X )2 ] = (X- )2 f(X) dX
-
E(X )
K=
Kurtosis:
4
Measures thickness of tails of a distribution
A kurtosis above three indicates fat tails or leptokurtosis,
relative to the normal, i.e. extreme events are more likely to
occur.
sample mean
will have a normal
distribution.
distribution: arises
from squared normal
random variables,
t distribution: arises
from ratios of normal
2
and
variables
F distribution: arises
2
from ratios of
variables.
distribution
t distribution (red),
normal distribution (blue)
F distribution
Fundamentals of Hypothesis
Testing
Identifying Hypotheses
1.
2.
3.
... Therefore, we
reject the null
hypothesis that
= 50.
... if in fact this were
the population mean.
20
= 50
H0
sample mean
Z=
X x
x
X
=
n
2. Compare to Critical Z Values
If Z-test statistic falls in critical region, reject H0;
Otherwise do not reject H0
p-value
Probability of obtaining a test statistic more
extreme ( or ) than actual sample value
given H0 is true
Smallest value of for which H0 can be
rejected
Used to make rejection decision
If p value , do not reject H0
If p value < , reject H0
Reject H0
Reject H0
Must be significantly
below .
Z = 1
/2 = .025
Standardized Normal
Probability Table (Portion)
.05
.06
.07
0 1.96 Z
Sampling Distribution
Level of Confidence
Rejection
Region
Rejection
Region
1-
1/2
1/2
Nonrejection
Region
Critical
Value
H0
Sample Statistic
Value Critical
Value
t-test, F-test
Test statistic may not be normally distributed
=> z-test not applicable
Examples: Variance unknown, but estimated.
Hypothesis that the slope of a regression line differs
significantly from zero.
=> t-test
Hypothesis that the standard deviations of two normally
distributed populations are equal.
=> F-test
Jarque-Bera test
Assesses whether a given sample of data is normally
distributed.
Aggregates information in the data about both skewness
and kurtosis. Test of the hypothesis that S = 0 and K = 3,
based on S and K .
2
T
1
2
Test statistic:
JB = S + K 3
(
4
y-intercept
random iid
error t (0, 2 )
slope
yt = 0 + 1 xt + t
dependent
(response)
variable
independent
(explanatory)
variable
Zero mean
Independence of errors (no autocorrelation)
Constant variance (homoscedasticity)
More things to think about:
Normality of t (if not satisfied, inference procedures only
asymptotically valid)
Model specification (e.g. linearity, 1 constant over time?)
yt = 0 + 1 xt + t
observed
value
t = disturbance
E y x* = 0 + 1 x*
x
observed value
y i = b0 + b1x i + ei
ei = Random
Error
y i = b0 + b1x i
Unsampled
Observation
x
Observed Value
x
min
y
t
0
1 t
0 , 1
t =1
t =1
= et 2
t =1
predicted
value
yt = 0 + 1 xt + t
e4
e2
e1
e3
fitted value
(in-sample forecast)
yt = 0 + 1 xt
2. Analyze residuals e
serial correlation
3. Test coefficients
for significance
yt = 0 + 1 xt
Variation Measures
Yi
Total Sum
of Squares
(Yi - Y)2
Unexplained Sum of
Squares (Yi - Y^i)2
Yi = b0 + b1X i
Explained Sum of
Squares (Y^i - Y)2
Xi
Coefficient of Determination
Proportion of Variation Explained by
Relationship Between X & Y
0 r2 1
2
r =
Explained Variation
Total Variation
n
i =1
i =1
SSR
SST
b0 Yi + b1 X iYi n (Y)
n
Yi
i =1
n (Y)
Y r2 = 1, r = -1
^=b +b X
Y
i
^=b +b X
Y
i
0
1 i
X
Yr2 = .8, r = +0.9
X
Y
^=b +b X
Y
i
0
1 i
X
1 i
r2 = 0, r = 0
^=b +b X
Y
i
0
1 i
X
SYX =
SYX =
Y
i =1
(
Y
Y
)
i i
i =1
n2
n
i =1
i =1
b0 Yi b1 X i Yi
n2
Residual Analysis
1.Graphical Analysis of Residuals
Plot residuals vs. Xi values
Residuals mean errors
Difference between actual Yi & predicted Yi
2.Purposes
Examine functional form (linear vs. non-Linear
Model)
Evaluate violations of assumptions
3.Test Statistic
b1
1
t
=
n2 S
b
1
S
YX
where S =
b
n 2
2
1
X
n
(
X
)
i
i =1