Motivation

Inference

P Values

Multiple Regression Model:

Finite Sample Inference I
Wooldridge (Chapter 4)
Dr. Rachida Ouysse
School of Economics
UNSW

Dr. Rachida Ouysse

ie-Slides04

Confidence Intervals

Motivation

Inference

P Values

Lecture Plan

Classical linear model assumptions

Sampling distribution of OLS estimators under CLM
Testing hypothesis about one population parameter
p-values
Confidence intervals
Test hypothesis with CI

Dr. Rachida Ouysse

ie-Slides04

Confidence Intervals

Motivation

Inference

P Values

Confidence Intervals

Motivation
Consider the regression model
y = 0 + 1 x1 + + k xk +
Goal is to gain knowledge about the population parameters s

in the model.
OLS provides the point estimates of the parameters.
OLS will get it right on average (being unbiased).
Knowing the mean and variance of is not enough. j
how to decide if a hypothesis is supported or not?
what we can say about the true values

We need the sampling distribution of the OLS estimators to

answer these questions.
To simplify, we use a strong assumption here (and will relax it
for large-sample cases).
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Motivation
Consider the regression model
y = 0 + 1 x1 + + k xk +
Goal is to gain knowledge about the population parameters s

in the model.
OLS provides the point estimates of the parameters.
OLS will get it right on average (being unbiased).
Knowing the mean and variance of is not enough. j
how to decide if a hypothesis is supported or not?
what we can say about the true values

We need the sampling distribution of the OLS estimators to

answer these questions.
To simplify, we use a strong assumption here (and will relax it
for large-sample cases).
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Motivation
Consider the regression model
y = 0 + 1 x1 + + k xk +
Goal is to gain knowledge about the population parameters s

in the model.
OLS provides the point estimates of the parameters.
OLS will get it right on average (being unbiased).
Knowing the mean and variance of is not enough. j
how to decide if a hypothesis is supported or not?
what we can say about the true values

We need the sampling distribution of the OLS estimators to

answer these questions.
To simplify, we use a strong assumption here (and will relax it
for large-sample cases).
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Motivation
Consider the regression model
y = 0 + 1 x1 + + k xk +
Goal is to gain knowledge about the population parameters s

in the model.
OLS provides the point estimates of the parameters.
OLS will get it right on average (being unbiased).
Knowing the mean and variance of is not enough. j
how to decide if a hypothesis is supported or not?
what we can say about the true values

We need the sampling distribution of the OLS estimators to

answer these questions.
To simplify, we use a strong assumption here (and will relax it
for large-sample cases).
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Motivation
Consider the regression model
y = 0 + 1 x1 + + k xk +
Goal is to gain knowledge about the population parameters s

in the model.
OLS provides the point estimates of the parameters.
OLS will get it right on average (being unbiased).
Knowing the mean and variance of is not enough. j
how to decide if a hypothesis is supported or not?
what we can say about the true values

We need the sampling distribution of the OLS estimators to

answer these questions.
To simplify, we use a strong assumption here (and will relax it
for large-sample cases).
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Motivation
Consider the regression model
y = 0 + 1 x1 + + k xk +
Goal is to gain knowledge about the population parameters s

in the model.
OLS provides the point estimates of the parameters.
OLS will get it right on average (being unbiased).
Knowing the mean and variance of is not enough. j
how to decide if a hypothesis is supported or not?
what we can say about the true values

We need the sampling distribution of the OLS estimators to

answer these questions.
To simplify, we use a strong assumption here (and will relax it
for large-sample cases).
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Motivation
Consider the regression model
y = 0 + 1 x1 + + k xk +
Goal is to gain knowledge about the population parameters s

in the model.
OLS provides the point estimates of the parameters.
OLS will get it right on average (being unbiased).
Knowing the mean and variance of is not enough. j
how to decide if a hypothesis is supported or not?
what we can say about the true values

We need the sampling distribution of the OLS estimators to

answer these questions.
To simplify, we use a strong assumption here (and will relax it
for large-sample cases).
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Motivation
Consider the regression model
y = 0 + 1 x1 + + k xk +
Goal is to gain knowledge about the population parameters s

in the model.
OLS provides the point estimates of the parameters.
OLS will get it right on average (being unbiased).
Knowing the mean and variance of is not enough. j
how to decide if a hypothesis is supported or not?
what we can say about the true values

We need the sampling distribution of the OLS estimators to

answer these questions.
To simplify, we use a strong assumption here (and will relax it
for large-sample cases).
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Normality Assumption: MLR6

6

(MLR6, normality) The disturbance is independent of all

explanatory variables and normally distributed with mean zero
and variance 2 :
Normal(0, 2 ).

This is a very strong assumption. It implies both MLR4 (ZCM)

and MLR5 (homoskedasticity).

MLR1-6 together are known as the classical linear model
(CLM) assumptions.
Under CLM, the OLS produces the minimum variance

unbiased estimators.
They are the best of unbiased estimators (not just the best of

linear unbiased estimators).

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Normality Assumption: MLR6

6

(MLR6, normality) The disturbance is independent of all

explanatory variables and normally distributed with mean zero
and variance 2 :
Normal(0, 2 ).

This is a very strong assumption. It implies both MLR4 (ZCM)

and MLR5 (homoskedasticity).

MLR1-6 together are known as the classical linear model
(CLM) assumptions.
Under CLM, the OLS produces the minimum variance

unbiased estimators.
They are the best of unbiased estimators (not just the best of

linear unbiased estimators).

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Normality Assumption: MLR6

6

(MLR6, normality) The disturbance is independent of all

explanatory variables and normally distributed with mean zero
and variance 2 :
Normal(0, 2 ).

This is a very strong assumption. It implies both MLR4 (ZCM)

and MLR5 (homoskedasticity).

MLR1-6 together are known as the classical linear model
(CLM) assumptions.
Under CLM, the OLS produces the minimum variance

unbiased estimators.
They are the best of unbiased estimators (not just the best of

linear unbiased estimators).

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Normality Assumption: MLR6

6

(MLR6, normality) The disturbance is independent of all

explanatory variables and normally distributed with mean zero
and variance 2 :
Normal(0, 2 ).

This is a very strong assumption. It implies both MLR4 (ZCM)

and MLR5 (homoskedasticity).

MLR1-6 together are known as the classical linear model
(CLM) assumptions.
Under CLM, the OLS produces the minimum variance

unbiased estimators.
They are the best of unbiased estimators (not just the best of

linear unbiased estimators).

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Normality Assumption: MLR6

6

(MLR6, normality) The disturbance is independent of all

explanatory variables and normally distributed with mean zero
and variance 2 :
Normal(0, 2 ).

This is a very strong assumption. It implies both MLR4 (ZCM)

and MLR5 (homoskedasticity).

MLR1-6 together are known as the classical linear model
(CLM) assumptions.
Under CLM, the OLS produces the minimum variance

unbiased estimators.
They are the best of unbiased estimators (not just the best of

linear unbiased estimators).

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Normality Assumption: MLR6

6

(MLR6, normality) The disturbance is independent of all

explanatory variables and normally distributed with mean zero
and variance 2 :
Normal(0, 2 ).

This is a very strong assumption. It implies both MLR4 (ZCM)

and MLR5 (homoskedasticity).

MLR1-6 together are known as the classical linear model
(CLM) assumptions.
Under CLM, the OLS produces the minimum variance

unbiased estimators.
They are the best of unbiased estimators (not just the best of

linear unbiased estimators).

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Classical Linear Model (CLM)

CLM implies y |x Normal 0 + 1 x1 + + k xk , 2

CLM also implies that bj is normally distributed.

Whether or not MLR6 is a reasonable assumption depends on

data.
Is it reasonable for wage model, given that no wage can be

negative?
Empirically, it is reasonable for log(wage) model.

MLR6 is restrictive. But the results here will be useful for

large-sample cases (Ch5) without MLR6

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Classical Linear Model (CLM)

CLM implies y |x Normal 0 + 1 x1 + + k xk , 2

CLM also implies that bj is normally distributed.

Whether or not MLR6 is a reasonable assumption depends on

data.
Is it reasonable for wage model, given that no wage can be

negative?
Empirically, it is reasonable for log(wage) model.

MLR6 is restrictive. But the results here will be useful for

large-sample cases (Ch5) without MLR6

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Classical Linear Model (CLM)

CLM implies y |x Normal 0 + 1 x1 + + k xk , 2

CLM also implies that bj is normally distributed.

Whether or not MLR6 is a reasonable assumption depends on

data.
Is it reasonable for wage model, given that no wage can be

negative?
Empirically, it is reasonable for log(wage) model.

MLR6 is restrictive. But the results here will be useful for

large-sample cases (Ch5) without MLR6

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Classical Linear Model (CLM)

CLM implies y |x Normal 0 + 1 x1 + + k xk , 2

CLM also implies that bj is normally distributed.

Whether or not MLR6 is a reasonable assumption depends on

data.
Is it reasonable for wage model, given that no wage can be

negative?
Empirically, it is reasonable for log(wage) model.

MLR6 is restrictive. But the results here will be useful for

large-sample cases (Ch5) without MLR6

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Classical Linear Model (CLM)

CLM implies y |x Normal 0 + 1 x1 + + k xk , 2

CLM also implies that bj is normally distributed.

Whether or not MLR6 is a reasonable assumption depends on

data.
Is it reasonable for wage model, given that no wage can be

negative?
Empirically, it is reasonable for log(wage) model.

MLR6 is restrictive. But the results here will be useful for

large-sample cases (Ch5) without MLR6

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Classical Linear Model (CLM)

CLM implies y |x Normal 0 + 1 x1 + + k xk , 2

CLM also implies that bj is normally distributed.

Whether or not MLR6 is a reasonable assumption depends on

data.
Is it reasonable for wage model, given that no wage can be

negative?
Empirically, it is reasonable for log(wage) model.

MLR6 is restrictive. But the results here will be useful for

large-sample cases (Ch5) without MLR6

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Sampling Distribution of OLS

Theorem (Sampling Distribution of OLS, known)
Under CLM, conditional on independent variables,


bj Normal j , 2j ,
where the variance is given in Ch3 (ie-Slides03)
2j = Var (bj ) =

2
,
SSTj (1 Rj2 )

for j = 1, , k.
The theorem implies

bj j
sd (bj )

Normal(0, 1), where

  q
sd bj = Var (bj ).
Dr. Rachida Ouysse

ie-Slides04

Confidence Intervals

Motivation

Inference

P Values

Confidence Intervals

Sampling Distribution of OLS

In practice, we have to estimate 2 and Var (bj ):

b2j = Var (bj ) =

b2
SSTj (1 Rj2 )

Theorem (4.2 Student t distribution)

Under CLM, conditional on independent variables,
bj j
  tnk1
se bj
  q
\
where the standard error se bj = Var (bj ).
So what do we do with this result?

This is the basis for statistical inference (finite sample!)

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing
Some questions of interest may be formulated as a simple null

hypothesis and an alternative hypothesis about a population

parameter
H0 : j = aj , , H1 : j 6= aj ( or > aj , or < aj )
for some known aj (often zero).
Example: In the log wage model
log(wage) = 0 + 1 educ + 2 exper + 3 tenure + ,
H0 : 1 = 0, is economically interesting. It says that, holding
exper and tenure fixed, a persons education level has no effect
on wage
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing
Some questions of interest may be formulated as a simple null

hypothesis and an alternative hypothesis about a population

parameter
H0 : j = aj , , H1 : j 6= aj ( or > aj , or < aj )
for some known aj (often zero).
Example: In the log wage model
log(wage) = 0 + 1 educ + 2 exper + 3 tenure + ,
H0 : 1 = 0, is economically interesting. It says that, holding
exper and tenure fixed, a persons education level has no effect
on wage
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: simple hypothesis

To test a simple null hypothesis H0 : j = aj , the test statistic

is usually the t-statistic

tbj =

bj j
 
se bj

.
We will call the t-statistic the t-ratio when aj = 0. The

STATA output includes the t-ratios.

By Theorem 4.2 the t-statistic has the t-distribution with

(n k 1) df, under the null H0

When df or n is large, the t-distribution approaches to the

standard normal distribution. See Table G.2 in Wooldridge.

The decision rule depends on the alternative H1
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: simple hypothesis

To test a simple null hypothesis H0 : j = aj , the test statistic

is usually the t-statistic

tbj =

bj j
 
se bj

.
We will call the t-statistic the t-ratio when aj = 0. The

STATA output includes the t-ratios.

By Theorem 4.2 the t-statistic has the t-distribution with

(n k 1) df, under the null H0

When df or n is large, the t-distribution approaches to the

standard normal distribution. See Table G.2 in Wooldridge.

The decision rule depends on the alternative H1
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: simple hypothesis

To test a simple null hypothesis H0 : j = aj , the test statistic

is usually the t-statistic

tbj =

bj j
 
se bj

.
We will call the t-statistic the t-ratio when aj = 0. The

STATA output includes the t-ratios.

By Theorem 4.2 the t-statistic has the t-distribution with

(n k 1) df, under the null H0

When df or n is large, the t-distribution approaches to the

standard normal distribution. See Table G.2 in Wooldridge.

The decision rule depends on the alternative H1
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: simple hypothesis

To test a simple null hypothesis H0 : j = aj , the test statistic

is usually the t-statistic

tbj =

bj j
 
se bj

.
We will call the t-statistic the t-ratio when aj = 0. The

STATA output includes the t-ratios.

By Theorem 4.2 the t-statistic has the t-distribution with

(n k 1) df, under the null H0

When df or n is large, the t-distribution approaches to the

standard normal distribution. See Table G.2 in Wooldridge.

The decision rule depends on the alternative H1
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: simple hypothesis

To test a simple null hypothesis H0 : j = aj , the test statistic

is usually the t-statistic

tbj =

bj j
 
se bj

.
We will call the t-statistic the t-ratio when aj = 0. The

STATA output includes the t-ratios.

By Theorem 4.2 the t-statistic has the t-distribution with

(n k 1) df, under the null H0

When df or n is large, the t-distribution approaches to the

standard normal distribution. See Table G.2 in Wooldridge.

The decision rule depends on the alternative H1
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: simple Hypothesis

When H0 is true, we can choose a critical value c such that

the probability of the t-statistic exceeding c is a small number,

known as significant level.
 

 
eg. P tbj  > c = 0.05.
c depends on df and the significant level. ( Use normal

critical values when df > 120)

If we reject H0 whenever the t-statistic exceeds c, the

probability that we make a (Type I) error is small.

Hence, reject H0 whenever the t-statistic exceeds c is a

reasonable decision rule.

What do we mean by the t-statistic exceeds c?

It depends on the alternative hypothesis H1

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: simple Hypothesis

When H0 is true, we can choose a critical value c such that

the probability of the t-statistic exceeding c is a small number,

known as significant level.
 

 
eg. P tbj  > c = 0.05.
c depends on df and the significant level. ( Use normal

critical values when df > 120)

If we reject H0 whenever the t-statistic exceeds c, the

probability that we make a (Type I) error is small.

Hence, reject H0 whenever the t-statistic exceeds c is a

reasonable decision rule.

What do we mean by the t-statistic exceeds c?

It depends on the alternative hypothesis H1

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: simple Hypothesis

When H0 is true, we can choose a critical value c such that

the probability of the t-statistic exceeding c is a small number,

known as significant level.
 

 
eg. P tbj  > c = 0.05.
c depends on df and the significant level. ( Use normal

critical values when df > 120)

If we reject H0 whenever the t-statistic exceeds c, the

probability that we make a (Type I) error is small.

Hence, reject H0 whenever the t-statistic exceeds c is a

reasonable decision rule.

What do we mean by the t-statistic exceeds c?

It depends on the alternative hypothesis H1

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: simple Hypothesis

When H0 is true, we can choose a critical value c such that

the probability of the t-statistic exceeding c is a small number,

known as significant level.
 

 
eg. P tbj  > c = 0.05.
c depends on df and the significant level. ( Use normal

critical values when df > 120)

If we reject H0 whenever the t-statistic exceeds c, the

probability that we make a (Type I) error is small.

Hence, reject H0 whenever the t-statistic exceeds c is a

reasonable decision rule.

What do we mean by the t-statistic exceeds c?

It depends on the alternative hypothesis H1

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: simple Hypothesis

When H0 is true, we can choose a critical value c such that

the probability of the t-statistic exceeding c is a small number,

known as significant level.
 

 
eg. P tbj  > c = 0.05.
c depends on df and the significant level. ( Use normal

critical values when df > 120)

If we reject H0 whenever the t-statistic exceeds c, the

probability that we make a (Type I) error is small.

Hence, reject H0 whenever the t-statistic exceeds c is a

reasonable decision rule.

What do we mean by the t-statistic exceeds c?

It depends on the alternative hypothesis H1

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: simple Hypothesis

When H0 is true, we can choose a critical value c such that

the probability of the t-statistic exceeding c is a small number,

known as significant level.
 

 
eg. P tbj  > c = 0.05.
c depends on df and the significant level. ( Use normal

critical values when df > 120)

If we reject H0 whenever the t-statistic exceeds c, the

probability that we make a (Type I) error is small.

Hence, reject H0 whenever the t-statistic exceeds c is a

reasonable decision rule.

What do we mean by the t-statistic exceeds c?

It depends on the alternative hypothesis H1

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: simple Hypothesis

When H0 is true, we can choose a critical value c such that

the probability of the t-statistic exceeding c is a small number,

known as significant level.
 

 
eg. P tbj  > c = 0.05.
c depends on df and the significant level. ( Use normal

critical values when df > 120)

If we reject H0 whenever the t-statistic exceeds c, the

probability that we make a (Type I) error is small.

Hence, reject H0 whenever the t-statistic exceeds c is a

reasonable decision rule.

What do we mean by the t-statistic exceeds c?

It depends on the alternative hypothesis H1

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: simple

Hypothesis
4. Multiple
Regression Model: Inference (Ch4)

Testing simple null hypothesis

Decision rule :

H0: j = aj

Lower
tail H1

Alternative H1:

j < aj j > aj

j aj

Reject H0 when

t j < -cc

|t | > c

Upper
tail H1

t j > c

Two
tail H1

eg.
g 5% significant
g
level,, df = 19.
For one tail H1, c = 1.729.
For two tail H1, c = 2.093.
Table G.2 of Wooldridge

f(t)

-c
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: Example 4.1

Consider the log wage model (standard errors are in brackets):

\ = .284 + .092 educ + .0041 expr + .022 tenure (1)

log(wage)
(.104)

(.007)

(.0017)

(.003)

n = 526, R 2 = .316
Q. is return to education statistically significant at the 1%
significance level, after controlling for experience and tenure?
Hypothesis: H0 : educ = 0, vs H1 : educ 6=0



Test statistic and decision rule: reject H0 if tb  > c
educ

(Two-sided) Critical value (large df, normal): c = 2.576

Conclusion: reject H0 at the 1% level because:

 .092


= 13.149 > c.
tbeduc  =
.007
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: Example 4.1

Consider the log wage model (standard errors are in brackets):

\ = .284 + .092 educ + .0041 expr + .022 tenure (1)

log(wage)
(.104)

(.007)

(.0017)

(.003)

n = 526, R 2 = .316
Q. is return to education statistically significant at the 1%
significance level, after controlling for experience and tenure?
Hypothesis: H0 : educ = 0, vs H1 : educ 6=0



Test statistic and decision rule: reject H0 if tb  > c
educ

(Two-sided) Critical value (large df, normal): c = 2.576

Conclusion: reject H0 at the 1% level because:

 .092


= 13.149 > c.
tbeduc  =
.007
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: Example 4.1

Consider the log wage model (standard errors are in brackets):

\ = .284 + .092 educ + .0041 expr + .022 tenure (1)

log(wage)
(.104)

(.007)

(.0017)

(.003)

n = 526, R 2 = .316
Q. is return to education statistically significant at the 1%
significance level, after controlling for experience and tenure?
Hypothesis: H0 : educ = 0, vs H1 : educ 6=0



Test statistic and decision rule: reject H0 if tb  > c
educ

(Two-sided) Critical value (large df, normal): c = 2.576

Conclusion: reject H0 at the 1% level because:

 .092


= 13.149 > c.
tbeduc  =
.007
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: Example 4.1

Consider the log wage model (standard errors are in brackets):

\ = .284 + .092 educ + .0041 expr + .022 tenure (1)

log(wage)
(.104)

(.007)

(.0017)

(.003)

n = 526, R 2 = .316
Q. is return to education statistically significant at the 1%
significance level, after controlling for experience and tenure?
Hypothesis: H0 : educ = 0, vs H1 : educ 6=0



Test statistic and decision rule: reject H0 if tb  > c
educ

(Two-sided) Critical value (large df, normal): c = 2.576

Conclusion: reject H0 at the 1% level because:

 .092


= 13.149 > c.
tbeduc  =
.007
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: Example 4.1

Consider the log wage model (standard errors are in brackets):

\ = .284 + .092 educ + .0041 expr + .022 tenure (1)

log(wage)
(.104)

(.007)

(.0017)

(.003)

n = 526, R 2 = .316
Q. is return to education statistically significant at the 1%
significance level, after controlling for experience and tenure?
Hypothesis: H0 : educ = 0, vs H1 : educ 6=0



Test statistic and decision rule: reject H0 if tb  > c
educ

(Two-sided) Critical value (large df, normal): c = 2.576

Conclusion: reject H0 at the 1% level because:

 .092


= 13.149 > c.
tbeduc  =
.007
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: Example 4.1

Consider the log wage model (standard errors are in brackets):

\ = .284 + .092 educ + .0041 expr + .022 tenure (1)

log(wage)
(.104)

(.007)

(.0017)

(.003)

n = 526, R 2 = .316
Q. is return to education statistically significant at the 1%
significance level, after controlling for experience and tenure?
Hypothesis: H0 : educ = 0, vs H1 : educ 6=0



Test statistic and decision rule: reject H0 if tb  > c
educ

(Two-sided) Critical value (large df, normal): c = 2.576

Conclusion: reject H0 at the 1% level because:

 .092


= 13.149 > c.
tbeduc  =
.007
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: Example 4.5

Housing prices and air pollution
\ = 11.08 .954 log(nox) .134 log(dist) + .255 rooms .052 stratio
log(price)
(.32)

(.117)

(.043)

(.019)

(.006)

n = 506, R 2 = .581

Q. is Is the price elasticity with respect to nox equal to 1?

Hypothesis: H0 : nox = 1, vs H1 : nox > 1
Test statistic
tbnox

bnox + 1
.954 + 1
= .393
=
.117
se(d
nox )

(One sided) Critical value at 5% significance level (large df,

normal): c = 1.645
Conclusion: Do not reject H0 at the 5% level because:
tbnox = .393 < c.
Dr. Rachida Ouysse

ie-Slides04

(3)

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: Example 4.5

Housing prices and air pollution
\ = 11.08 .954 log(nox) .134 log(dist) + .255 rooms .052 stratio
log(price)
(.32)

(.117)

(.043)

(.019)

(.006)

n = 506, R 2 = .581

Q. is Is the price elasticity with respect to nox equal to 1?

Hypothesis: H0 : nox = 1, vs H1 : nox > 1
Test statistic
tbnox

bnox + 1
.954 + 1
= .393
=
.117
se(d
nox )

(One sided) Critical value at 5% significance level (large df,

normal): c = 1.645
Conclusion: Do not reject H0 at the 5% level because:
tbnox = .393 < c.
Dr. Rachida Ouysse

ie-Slides04

(3)

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: Example 4.5

Housing prices and air pollution
\ = 11.08 .954 log(nox) .134 log(dist) + .255 rooms .052 stratio
log(price)
(.32)

(.117)

(.043)

(.019)

(.006)

n = 506, R 2 = .581

Q. is Is the price elasticity with respect to nox equal to 1?

Hypothesis: H0 : nox = 1, vs H1 : nox > 1
Test statistic
tbnox

bnox + 1
.954 + 1
= .393
=
.117
se(d
nox )

(One sided) Critical value at 5% significance level (large df,

normal): c = 1.645
Conclusion: Do not reject H0 at the 5% level because:
tbnox = .393 < c.
Dr. Rachida Ouysse

ie-Slides04

(3)

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: Example 4.5

Housing prices and air pollution
\ = 11.08 .954 log(nox) .134 log(dist) + .255 rooms .052 stratio
log(price)
(.32)

(.117)

(.043)

(.019)

(.006)

n = 506, R 2 = .581

Q. is Is the price elasticity with respect to nox equal to 1?

Hypothesis: H0 : nox = 1, vs H1 : nox > 1
Test statistic
tbnox

bnox + 1
.954 + 1
= .393
=
.117
se(d
nox )

(One sided) Critical value at 5% significance level (large df,

normal): c = 1.645
Conclusion: Do not reject H0 at the 5% level because:
tbnox = .393 < c.
Dr. Rachida Ouysse

ie-Slides04

(3)

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: Example 4.5

Housing prices and air pollution
\ = 11.08 .954 log(nox) .134 log(dist) + .255 rooms .052 stratio
log(price)
(.32)

(.117)

(.043)

(.019)

(.006)

n = 506, R 2 = .581

Q. is Is the price elasticity with respect to nox equal to 1?

Hypothesis: H0 : nox = 1, vs H1 : nox > 1
Test statistic
tbnox

bnox + 1
.954 + 1
= .393
=
.117
se(d
nox )

(One sided) Critical value at 5% significance level (large df,

normal): c = 1.645
Conclusion: Do not reject H0 at the 5% level because:
tbnox = .393 < c.
Dr. Rachida Ouysse

ie-Slides04

(3)

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: Example 4.5

Housing prices and air pollution
\ = 11.08 .954 log(nox) .134 log(dist) + .255 rooms .052 stratio
log(price)
(.32)

(.117)

(.043)

(.019)

(.006)

n = 506, R 2 = .581

Q. is Is the price elasticity with respect to nox equal to 1?

Hypothesis: H0 : nox = 1, vs H1 : nox > 1
Test statistic
tbnox

bnox + 1
.954 + 1
= .393
=
.117
se(d
nox )

(One sided) Critical value at 5% significance level (large df,

normal): c = 1.645
Conclusion: Do not reject H0 at the 5% level because:
tbnox = .393 < c.
Dr. Rachida Ouysse

ie-Slides04

(3)

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: P Values

The choice of significant level is somewhat arbitrary. Different

researchers may have different choices (We tend to use high

levels with small samples).
It is more informative to measure the data evidence for H0 .

The p-value serves this role.

The p-value is the probability of the null distribution beyond

the observed test statistic:




p value = P |T | > tb




educ

reported routinely by software.

Smaller the p-value, stronger the evidence against H0

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: P Values

The choice of significant level is somewhat arbitrary. Different

researchers may have different choices (We tend to use high

levels with small samples).
It is more informative to measure the data evidence for H0 .

The p-value serves this role.

The p-value is the probability of the null distribution beyond

the observed test statistic:




p value = P |T | > tb




educ

reported routinely by software.

Smaller the p-value, stronger the evidence against H0

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: P Values

The choice of significant level is somewhat arbitrary. Different

researchers may have different choices (We tend to use high

levels with small samples).
It is more informative to measure the data evidence for H0 .

The p-value serves this role.

The p-value is the probability of the null distribution beyond

the observed test statistic:




p value = P |T | > tb




educ

reported routinely by software.

Smaller the p-value, stronger the evidence against H0

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Hypothesis testing: P Values

The choice of significant level is somewhat arbitrary. Different

researchers may have different choices (We tend to use high

levels with small samples).
It is more informative to measure the data evidence for H0 .

The p-value serves this role.

The p-value is the probability of the null distribution beyond

the observed test statistic:




p value = P |T | > tb




educ

reported routinely by software.

Smaller the p-value, stronger the evidence against H0

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Economic/statistical significance

An explanatory variable is statistically significant when the size

of the t-ratio is sufficiently large (beyond the critical value c).

An explanatory variable is economically or practically)

significant when the size of the estimate bj sufficiently large

(in comparison to the size of y )
An important x should be both statistically and economically

significant.
Over-emphasising statistical significance may lead to false

conclusion about the importance of an x.

See the guidelines on p137, and Example 4.6-4.7.

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Economic/statistical significance

An explanatory variable is statistically significant when the size

of the t-ratio is sufficiently large (beyond the critical value c).

An explanatory variable is economically or practically)

significant when the size of the estimate bj sufficiently large

(in comparison to the size of y )
An important x should be both statistically and economically

significant.
Over-emphasising statistical significance may lead to false

conclusion about the importance of an x.

See the guidelines on p137, and Example 4.6-4.7.

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Economic/statistical significance

An explanatory variable is statistically significant when the size

of the t-ratio is sufficiently large (beyond the critical value c).

An explanatory variable is economically or practically)

significant when the size of the estimate bj sufficiently large

(in comparison to the size of y )
An important x should be both statistically and economically

significant.
Over-emphasising statistical significance may lead to false

conclusion about the importance of an x.

See the guidelines on p137, and Example 4.6-4.7.

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Economic/statistical significance

An explanatory variable is statistically significant when the size

of the t-ratio is sufficiently large (beyond the critical value c).

An explanatory variable is economically or practically)

significant when the size of the estimate bj sufficiently large

(in comparison to the size of y )
An important x should be both statistically and economically

significant.
Over-emphasising statistical significance may lead to false

conclusion about the importance of an x.

See the guidelines on p137, and Example 4.6-4.7.

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Economic/statistical significance

An explanatory variable is statistically significant when the size

of the t-ratio is sufficiently large (beyond the critical value c).

An explanatory variable is economically or practically)

significant when the size of the estimate bj sufficiently large

(in comparison to the size of y )
An important x should be both statistically and economically

significant.
Over-emphasising statistical significance may lead to false

conclusion about the importance of an x.

See the guidelines on p137, and Example 4.6-4.7.

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Confidence intervals
To construct CI, we need bj , se(bj ) and c:

bj c se(bj )
For
 need
 df and the confidence level (1 ):
c, we

 
P tbj  > c = /2.
When df is large (> 120), the tnk1 distribution is very close
to the normal distribution and we use Normal(0, 1) critical
values.
eg. For large df, the (1 )100% = 95% CI is bj 2 se(bj )
The interpretation of (1 ) CI
bj c se(bj ) [L, U]
if many random samples are drawn and [L, U] is computed for
each sample, then 95% of these [L, U] will cover the true
population parameter j .
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Confidence intervals
To construct CI, we need bj , se(bj ) and c:

bj c se(bj )
For
 need
 df and the confidence level (1 ):
c, we

 
P tbj  > c = /2.
When df is large (> 120), the tnk1 distribution is very close
to the normal distribution and we use Normal(0, 1) critical
values.
eg. For large df, the (1 )100% = 95% CI is bj 2 se(bj )
The interpretation of (1 ) CI
bj c se(bj ) [L, U]
if many random samples are drawn and [L, U] is computed for
each sample, then 95% of these [L, U] will cover the true
population parameter j .
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Confidence intervals
To construct CI, we need bj , se(bj ) and c:

bj c se(bj )
For
 need
 df and the confidence level (1 ):
c, we

 
P tbj  > c = /2.
When df is large (> 120), the tnk1 distribution is very close
to the normal distribution and we use Normal(0, 1) critical
values.
eg. For large df, the (1 )100% = 95% CI is bj 2 se(bj )
The interpretation of (1 ) CI
bj c se(bj ) [L, U]
if many random samples are drawn and [L, U] is computed for
each sample, then 95% of these [L, U] will cover the true
population parameter j .
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Confidence intervals
To construct CI, we need bj , se(bj ) and c:

bj c se(bj )
For
 need
 df and the confidence level (1 ):
c, we

 
P tbj  > c = /2.
When df is large (> 120), the tnk1 distribution is very close
to the normal distribution and we use Normal(0, 1) critical
values.
eg. For large df, the (1 )100% = 95% CI is bj 2 se(bj )
The interpretation of (1 ) CI
bj c se(bj ) [L, U]
if many random samples are drawn and [L, U] is computed for
each sample, then 95% of these [L, U] will cover the true
population parameter j .
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Confidence intervals
To construct CI, we need bj , se(bj ) and c:

bj c se(bj )
For
 need
 df and the confidence level (1 ):
c, we

 
P tbj  > c = /2.
When df is large (> 120), the tnk1 distribution is very close
to the normal distribution and we use Normal(0, 1) critical
values.
eg. For large df, the (1 )100% = 95% CI is bj 2 se(bj )
The interpretation of (1 ) CI
bj c se(bj ) [L, U]
if many random samples are drawn and [L, U] is computed for
each sample, then 95% of these [L, U] will cover the true
population parameter j .
Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Confidence intervals
The width of CI depends on the standard error se(bj ) and the

critical value c.
high confidence level large c wide CI,
large standard error wide CI.

CI and two-tailed test

test H0 : j = aj against H1 : j 6= aj .
reject H0 at the 5% significant level if (and only if) the 95% CI
does not contain aj .
Example 4.5

95% CI = [1.183, 0.725].

Do not reject H0 : nox = 1 in favour of H1 : nox 6= 1 at

the 5% significant level.

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Confidence intervals
The width of CI depends on the standard error se(bj ) and the

critical value c.
high confidence level large c wide CI,
large standard error wide CI.

CI and two-tailed test

test H0 : j = aj against H1 : j 6= aj .
reject H0 at the 5% significant level if (and only if) the 95% CI
does not contain aj .
Example 4.5

95% CI = [1.183, 0.725].

Do not reject H0 : nox = 1 in favour of H1 : nox 6= 1 at

the 5% significant level.

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Confidence intervals
The width of CI depends on the standard error se(bj ) and the

critical value c.
high confidence level large c wide CI,
large standard error wide CI.

CI and two-tailed test

test H0 : j = aj against H1 : j 6= aj .
reject H0 at the 5% significant level if (and only if) the 95% CI
does not contain aj .
Example 4.5

95% CI = [1.183, 0.725].

Do not reject H0 : nox = 1 in favour of H1 : nox 6= 1 at

the 5% significant level.

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Confidence intervals
The width of CI depends on the standard error se(bj ) and the

critical value c.
high confidence level large c wide CI,
large standard error wide CI.

CI and two-tailed test

test H0 : j = aj against H1 : j 6= aj .
reject H0 at the 5% significant level if (and only if) the 95% CI
does not contain aj .
Example 4.5

95% CI = [1.183, 0.725].

Do not reject H0 : nox = 1 in favour of H1 : nox 6= 1 at

the 5% significant level.

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Confidence intervals
The width of CI depends on the standard error se(bj ) and the

critical value c.
high confidence level large c wide CI,
large standard error wide CI.

CI and two-tailed test

test H0 : j = aj against H1 : j 6= aj .
reject H0 at the 5% significant level if (and only if) the 95% CI
does not contain aj .
Example 4.5

95% CI = [1.183, 0.725].

Do not reject H0 : nox = 1 in favour of H1 : nox 6= 1 at

the 5% significant level.

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Confidence intervals
The width of CI depends on the standard error se(bj ) and the

critical value c.
high confidence level large c wide CI,
large standard error wide CI.

CI and two-tailed test

test H0 : j = aj against H1 : j 6= aj .
reject H0 at the 5% significant level if (and only if) the 95% CI
does not contain aj .
Example 4.5

95% CI = [1.183, 0.725].

Do not reject H0 : nox = 1 in favour of H1 : nox 6= 1 at

the 5% significant level.

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Confidence intervals
The width of CI depends on the standard error se(bj ) and the

critical value c.
high confidence level large c wide CI,
large standard error wide CI.

CI and two-tailed test

test H0 : j = aj against H1 : j 6= aj .
reject H0 at the 5% significant level if (and only if) the 95% CI
does not contain aj .
Example 4.5

95% CI = [1.183, 0.725].

Do not reject H0 : nox = 1 in favour of H1 : nox 6= 1 at

the 5% significant level.

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Confidence intervals
The width of CI depends on the standard error se(bj ) and the

critical value c.
high confidence level large c wide CI,
large standard error wide CI.

CI and two-tailed test

test H0 : j = aj against H1 : j 6= aj .
reject H0 at the 5% significant level if (and only if) the 95% CI
does not contain aj .
Example 4.5

95% CI = [1.183, 0.725].

Do not reject H0 : nox = 1 in favour of H1 : nox 6= 1 at

the 5% significant level.

Dr. Rachida Ouysse

ie-Slides04

Motivation

Inference

P Values

Confidence Intervals

Confidence intervals
The width of CI depends on the standard error se(bj ) and the

critical value c.
high confidence level large c wide CI,
large standard error wide CI.

CI and two-tailed test

test H0 : j = aj against H1 : j 6= aj .
reject H0 at the 5% significant level if (and only if) the 95% CI
does not contain aj .
Example 4.5

95% CI = [1.183, 0.725].

Do not reject H0 : nox = 1 in favour of H1 : nox 6= 1 at

the 5% significant level.

Dr. Rachida Ouysse

ie-Slides04