STATISTICAL INFERENCE

^β and ^β can be expressed as linear combinations of the Y j. The coefficients of the linear combination
0 1

depend only on the X j .

n

n ∑ X j− X n
^β 1=∑ b j Y j where b j= j=1
n
j=1
∑ ( X ¿ ¿ l−X n )2 ¿
l=1
n
^β 0=∑ a j Y j where a j= 1 −b j X n
j=1 n

Additional assumption for inference:

6) The ε j are i.i.d. rvs. with Normal distribution:
2
ε j N (0 , σ ε )

If the Y j and the ε j are i.i.d. rvs. with Normal distribution, then also ^β 0 and ^β 1 have a Normal distribution
(any linear combination of Gaussian r.vs. is a Gaussian r.v.).

( )
2
^β ∨X N β , σ ε
1 1
SST X

( )
n

2 ∑ Xj
2
σ
^β ∨ X N β , ε j=1
0 0
n SST X
Hypothesis testing
As we know, ^β 0 and ^β 1 are r.vs. and, therefore, they are subject to uncertainty.
We can make hypotheses about them, for example: does X influences Y?

{ H 0 : β 1=0
H 1 : β 1 ≠ 0∨β 1> 0∨β 1 <0

The first one is the null hypothesis (X has no effect on Y), while the second one is the alternative
hypothesis (X has en effect on Y, or X has a positive effect on Y, or X has a negative effect on Y).
We prove that the null hypothesis is very unlikely, not that the alternative hypothesis is true.

If the null is true

( )
2
^β ∨X N 0 , σ ε
1
SST X

How do we choose the alternative hypotesis?

The t-statistic or t-ratio plays a key-role in the hypothesis testing
^β −β H 0
1 1
t=
√ V [β ∨X]
^
1

H0 β^ 1
β 1 =0 →t= N (0 , 1)
For example, σε
√ SST X

The significance level α is the probability of rejecting the null (in favor of the alternative) when the null is
true. Smaller is the significance level, more reliable is the inference.

The rejection rules are:

 I reject H 0 in favor of H 1 : β1 >0 with a significance level α if and only if
^β −β H 0
1 1
t= >z α
√ V [ β ∨ X ] 1−( 2 )
^
1

 I reject H 0 in favor of H 1 : β1 <0 with a significance level α if and only if

^β −β H 0

t= 1 1 >−z α
√
V [ β^ ∨ X ] 1− ( )
2
1

 I reject H 0 in favor of H 1 : β1 ≠ 0 with a significance level α if and only if

¿ t∨¿ ¿ β^ 1−β H1 ∨ 0 ¿ > z 1−α ¿
V [ β1 ∨X ]
^ √

The p-value is the smallest significance level at which you can reject the null. Or it is the
probability, under the null, of obtaining test results at least as extreme as those observed.

If p-value < 0.05, you reject the null with a significance level of at least 5%.
Smaller is the p-value, more significant are the results.