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Hypothesis Testing
The F statistic is the ratio of the explained
variation to the unexplained variation.
In order for a model to be significant the
explained variation must be larger than the
unexplained variation.
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Hypothesis Testing
There is a relationship between R
2
and F
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2
2
( 1)
(1 ) ( )
R k
F
R n k
Specification Error
One assumption of the classical linear model
is that the model is correctly specified.
Must have the right variables
Must have the correct functional form
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Specification Error
This assumption is critical if we are to obtain
unbiased estimators.
An estimator is unbiased if:
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2 2
( ) E
Specification Error
Suppose we have the following model:
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0 1 1 2 2 i i
Y X X e
Specification Error
However we estimate:
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0 1 1 i i
Y X e
Specification Error
In this case we do not have an unbiased
estimator:
Where
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1 1 2 12 i
b e
2 0 12 1 i
X b b X u
Specification Error
In this case:
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1 1 2 12
( ) E b