Multiple regression analysis:

the problem of inference

Chapter 8
Hypothesis testing about individual partial
regression coefficient
 If we assume that ui ~ N(0, 2), we can use t test
to test a hypothesis about any individual partial
regression coefficient

 H0: i = 0 and H1: i  0

ˆi  i
t-statistic: t 
 

se ˆ i

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Testing the overall significance of the
sample regression
Given the k-variable regression model:
Yi  1   2 X 2i   3 X 3i  ...   k X ki  ui
To test the hypothesis
H 0 : 1   2   3 X 3i  ...   k  0
H1 : Not all slope coefficient are simultaneously zero
F statistic:
ESS df ESS  k  1
F 
RSS df RSS  n  k 
Decision rule: if F > Fα, df(k-1; n-k) , reject H 0

01/06/22 Prepared by Sri Yani K 3

An important relationship between R2
and F
ESS  k  1 ESS  n  1
F 
RSS  n  1 RSS  k  1


 n  1 ESS

 n  1 ESS TSS
 k  1 TSS  ESS  k  1 1   ESS TSS 

 n  1 R 2
 k  1 1  R 2

R 2  k  1

 1  R 2
  n  1
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The “incremental” contribution of an
explanatory variable
 When to add a new variable
ESS new  ESSold number of new regressor
F
RSSnew n  number of parameters in the new model
or

F
 R  R  number of new regressor
2
new
2
old

 1 R
2
new  n  number of parameters in the new model
 Competing models involving the same
dependent variable but with different explanatory
variables

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Testing the equality of two
regression coefficients
Model: Yi  1   2 X 2i  3 X 3i  4 X 4i  ui
To test the hypothesis:
H 0 : 3   4 or  3   4   0
H1 :  3   4 or  3  4   0
Test statistic:

t
 ˆ  ˆ       
3 4 3 4

 ˆ  ˆ 
3 4

se  ˆ  ˆ 
3 4 var  ˆ   var  ˆ   2 cov  ˆ , ˆ 
3 4 3 4

Decision Rule: if t > t-table, reject H 0

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Restricted Least Squares: testing
linear equality restrictions
 For instance, consider the Cobb-Douglas
Production Function:
2 3 ui
Yi  1 X X e 2i 3i
 Written in log form
ln Yi   0   2 ln X 2i  3 ln X 3i  ui
where  0  ln 1
 If there are constant returns to scale, economic
theory suggest that  2  3  1

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Restricted Least Squares: testing
linear equality restrictions
 The t test approach
H 0 :   2  3   1
H1 :   2   3   1

t
 
ˆ2  ˆ3    2  3 

 
ˆ2  ˆ3  1


se ˆ2  ˆ3     
var ˆ2  var ˆ3  2cov ˆ2 , ˆ3  
if t > t-table, reject H 0

01/06/22 Prepared by Sri Yani K 8

Restricted Least Squares: testing
linear equality restrictions
 The F test approach

 RSS R  RSSUR  m    R  UR

2 2
m ˆ
u ˆ
u
F 
RSSUR  n  k   UR  n  k 
ˆ
u 2

F
 2
RUR  RR2  m
 1  RUR
2
  nk
m = number of linear restriction
k = number of parameters in the unresticted regressions
n = number of observations

01/06/22 Prepared by Sri Yani K 9

Comparing two regression: testing for
structural regression model
 Gregory Chow (1960): Chow test
 The assumptions:
1. The two error terms are normally distributed with
the same variance
 
u1t ~ N 0,  2 and u2t ~ N 0,  2  
2. u1t and u2t are independently distributed
 Regression model
 1 Yt  1   2 X t  u1t t  1, 2,..., n1
 2 Yt  1   2 X t  u1t t  1, 2,..., n2

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Comparing two regression: testing for
structural regression model

 The Chow test proceeds as follows

1. Combining all n1 and n2 observations, estimate
and obtain its RSS, S1, with df=(n1+n2-k)
2. Estimate the models individually and obtain
their RSS, S2 and S3, with df=(n1-k) and (n2-k).
3. Add these two RSS, S4=S2+S3 with df=(n1+n2-
2k)
4. Obtain S5=S1-S4

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Comparing two regression: testing for
structural regression model
4. Given the assumptions of the Chow test, it can
be show that
S5 k
F
S4  n1  n2  2k 
if F > the critical F  reject H0 that the two
regressions are the same, that is, reject the
hypothesis of structural stability

01/06/22 Prepared by Sri Yani K 12

Testing the functional form of
regression
 MacKinnon, White, and Davidson (1983):
MWD test  Choosing between linear and
log-linear regression models

 H0: Linear model Yt  1   2 X 2t   3 X 3t  ut

H1: Log-linear model ln Yt  1   2 ln X 2t  3 ln X 3t  ut

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Testing the functional form of
regression
 The steps of the MWD test
1. Estimate the linear model and obtain the estimated Y 
Yf
2. Estimate the log-linear model and obtain the estimated
lnY  ln f
3. Obtain Z1 = ln (Yf) – ln f
4. Regress Y on X’s and Z1. Reject H0 if the coefficient of
Z1 is statistically significant
5. Obtain Z2 = antilog (ln f) – Yf
6. Regress log of Y on the log of X’s and Z2. Reject H1 if
the coefficient of Z2 is statistically significant

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