Econometrics

1
Lecture 3

Topics for today

Normal distribu9ons and the t-distribu9on
Mul9ple Regression
Concept and Basic Idea
Es9ma9on methods (OLS and Maximum
Likelihood)
Tes9ng Hypotesis and interpreta9on of model
paramaters
Applica9on of mul9ple regression in empirical
research

Normal Distribu9on
The normal curve is bell-shaped and has a single
peak at the exact center of the distribu9on. It is a
con9nuous probability func9on.
The arithme9c mean, median, and mode of the
distribu9on are equal and located at the peak.
Half the area under the curve is above the peak,
and the other half is below it (because the peak is
the median).
It is described by its mean and variance:
N(,2)

Normal Distribu9on

Standard Normal Distribu9on (Z)

Standard Normal Distribu9on (Z)

A normal distribu9on with a mean of 0 and a
variance of 1.
Let X be any normal distribu9on, X~N(,2)
Z value: The distance between a selected value,
designated X, and the popula9on mean ,
divided by the popula9on standard devia9on, .
Z= X-/
Important: This standardiza9on calcula9on can
convert any normal distribu9on into one that has
the same mean (zero) and variance (one)

Example On Area Under Normal

Distribu9ons

A professor teaches a course with a very large

number of students. She nds nal grades for
the course are normally distributed with a
mean of 75 and a variance of 100. She decides
that the top 30% of students deserve an A.
What are the lowest grades a student needs
to earn an A or a B?

Standard Normal

Example
Nilai murid: X.
X ~ N(75,100)
Kita perlu melihat Standard Normal Distribu9on Table.

Assume Z ~ N(0,1).
Top 30% mendapat nilai A. Nilai Z pada tabel yang
memberikan area 30% di bawah kurva adalah Z=0.52.
P(Z > z) = 0.20 z=0.52
X-75 = 0.52 X=80.2 Murid yang mendapat nilai 80.2
ke atas yang mendapat nilai A

t-distribu9on

When we know the true popula9on standard
devia9on, we can calculate the Z sta9s9c as
we learned, which has a normal distribu9on.
But if we dont know the standard devia9on,
we have to standardize the sampling
distribu9on by calcula9ng the t-sta9s9c with
our es9mate:
t=X-/

Mul9ple Regression
Yi =0 +1X1i +2X2i+3X3i+i
Y is the dependent variable, X2 and X3 are the
explanatory variables (or regressors), is the
stochas9c disturbance term.
We can also say:
E(Y|X1, X2, X3)= 0 +1X1i +2X2i+3X3i
0= intercept term Y when X1, X2, X3 are set
to zero.
1, 2, 3 par9al regression coefcients.

Par9al Regression Coecients

1, 2, 3 par9al regression coefcients.
Or par9al slope coefcients.
The meaning of par9al regression coefcient
is as follows: 2 measures the change in the
mean value of Y , E (Y ), per unit change in X2,
holding X1 and X3 constant.
It gives direct or the net eect of a unit
change in X2 on the mean value of Y.

Es9ma9on
OLS
Maximum Likelihood Es9ma9on

Assump9ons and Proper9es of OLS

Es9mators
Last week lectures

2
2
R and Adjusted R

R2 can be increased just by including more

explanatory variables.
Regression A:
Weighti =103.40+6.38Heighti
R2 = 0.74
Regression B:
Weighti =102.35+6.36Heighti+0.02PostOceBoxi
R2 = 0.75

Post Oce Box Number is a nonsense variable

2
Adjusted R

Terdapat tradeo antara jumlah explanatory

variable dan adjusted R2 Apabila jumlah
independent variable naik R2 naik, tetapi k
juga naik.

Hypothesis Tes9ng
Uji Hipotesis adalah penggunaan ilmu
sta9s9ka inferensial (probabilitas) yang
dipergunakan untuk menguji kebenaran suatu
pernyataan meengenai parameter populasi
secara sta9s9k dan menarik kesimpulan
apakah 9dak menolak atau menolak
pernyataan tersebut.

Null Hypothesis (H0)

Pernyataan mengenai nilai parameter populasi.
It is a statement of the range of values of the
regression coecient that would be expected if
the researchers theory were not correct.
Selalu mengandung pernyataan sama dengan,
Contoh: H0:B1=0; H0:B10 ;H0:B10
Pada Uji hipotesis kita akan menolak H0 atau
9dak bisa (9dak cukup buk9) menolak H0

Alterna9ve Hypothesis (H1)

Kebalikan dari Null Hypothesis:

Contoh: H1: B10; H1: B1>0 ; H1: B1<0
Apabila kita menolak H0 Terima H1
Apabila 9dak cukup buk9 untuk menerima
Ho Tidak terima H1

Type1 and Type2 Error

Type I Error: The null hypothesis is actually true,
but we reject it.
Type II Error: The null hypothesis is actually false,
but we do not reject it.
Example:
H0: The defendant is innocent
H1: The defendant is guilty
Type I: send innocent defendant to jail
Type II: free a guilty defendant

Level of Signicance,

The level of signicance is the probability you
will allow for rejec9ng a null hypothesis when
it was actually true.
Denes unlikely values of sample sta9s9c if
null hypothesis is true
Called rejec9on region of the sampling
distribu9on
Is designated by , (level of signicance)
Typical values are .01, .05, .10

Level of Signicance and the Rejec9on

Region

Steps to Hypothesis Tes9ng

Step 1: Write out the expected signs for the coecients;
Step 2: Set-up both null and alterna9ve hypotheses;
Step 3: State your decision rule(s);
Step 4: Calculate your t-sta9s9cs/ pvalues;
Step 5: Evaluate sta9s9cal signicance of your es9mated
coecients using the decision rule from Step 3;
Step 6: Interpret the economic meaning of the es9mated
coecients (only for those that are signicant from zero);
Step 7: Construct a condence interval around your
es9mated coecient(s). This step is op9onal.

Steps to Hypothesis Tes9ng

Step 3: State your decision rule(s)

State your level of signicance () 5%
Find tcritt (5%, df) =t(5%, n-k-1)= t(5%, 78-4-1)=
t(5%, 73) =1.67
Reject the null hypothesis (H0) and accept the
alterna9ve hypothesis (H1) if
1) the absolute value of the t-sta9s9c, | t-stat |, is
greater than tcv (the cri9cal value of t) or
pvalue<
1) the es9mated coecient is of the expected sign

Otherwise, fail to reject H0.

Step 4: Calculate your t-sta9s9cs/

pvalue

Step 5: Evaluate signicance of your

es9mated coecients

Step 6: Interpret the economic

meaning of the es9mated coecients