As a researcher, u do not solve the problem

U find what might solve the problem

My work is to minimize the random variation as much as possible

Small e is the estimate for U

Explanatory power of the model

What is test statistic?

T is small, accept the hypothesis

T is large, reject the hypothesis

Criteria for acceptance and rejection

T is inversely related to P (Probability)

What is the possibility of rejection of the model? (alpha, 5%, rest 95% is the confidence Interval)

I am 95% sure of my hypothesis

p>0.05: region of acceptance of H0

p<0.05: reject

Why you want t to be large? Because we have propsed that Beta1 is zero

When you do not check for only individual variable but multiple variables and model on a whole, we
use F-statistic!

Higher F, greater the possibility of rejection (same rule for P also)

How R and F are different?

R2= ESS/TSS

F = ESS/(n-1)

---------------

RSS / (n-k)

Write eqn of F in terms of R2 (SSR)

Eviews

- Select dependent variable first

- Then select independent
- Right click open as eqn
- C is the intercept
Remove age (cleansing of data)

Don’t conclude merely based on R2.

Consumption as a function of income and wealth

R2 is very high but both the IVs are insignificant.
Together IVs doing great job but independently not
You cannot think of change in consumption due to change in wealth keeping income as
constant