Scribd
Upload
2 views10 pages

Appendix

The document discusses the significance of R-squared (R2) in multiple regression analysis, emphasizing that low R2 values are common in cross-sectional data and should not be a cause for concern if the model is well specified. It outlines when to add new variables based on changes in adjusted R2 and presents examples of regression outputs, including Cobb-Douglas production functions and restricted least squares. Additionally, it highlights the distinction between t-tests for individual coefficients and F-tests for overall model significance.

Uploaded by

shishirbecon2024
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
2 views10 pages

Appendix

The document discusses the significance of R-squared (R2) in multiple regression analysis, emphasizing that low R2 values are common in cross-sectional data and should not be a cause for concern if the model is well specified. It outlines when to add new variables based on changes in adjusted R2 and presents examples of regression outputs, including Cobb-Douglas production functions and restricted least squares. Additionally, it highlights the distinction between t-tests for individual coefficients and F-tests for overall model significance.

Uploaded by

shishirbecon2024
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Testing the Overall Significance of a

Multiple Regression in Terms of R2


Hypothesis Testing
• Discuss about in previous slide: What happens
to F-stat for per R2=0 and it equals 1.
• An important empirical observation that in
cross-sectional data involving several
observations, one generally obtains low R2
because of the diversity of the cross-sectional
units. Therefore, one should not be surprised
or worried about finding low R2’s in cross-
sectional regressions.
Low R2 ?
• What is relevant is that the model is correctly
specified, that the regressors have the correct
(i.e., theoretically expected) signs, and that
(hopefully) the regression coefficients are
statistically significant.
When to Add a New Variable?
• If the inclusion of a variable increases Adj. R2,it
is retained in the model although it does not
reduce RSS significantly in the statistical sense.
When to Add a New Variable?
. reg CM PGNP

Source SS df MS Number of obs = 64


F(1, 62) = 12.36
Model 60449.4605 1 60449.4605 Prob > F = 0.0008
Residual 303228.539 62 4890.78289 R-squared = 0.1662
Adj R-squared = 0.1528
Total 363678 63 5772.66667 Root MSE = 69.934

CM Coef. Std. Err. t P>|t| [95% Conf. Interval]

PGNP -.0113645 .0032325 -3.52 0.001 -.0178262 -.0049027


_cons 157.4244 9.845583 15.99 0.000 137.7434 177.1055
When to Add a New Variable?
. reg CM PGNP FLFP

Source SS df MS Number of obs = 64


F(2, 61) = 73.83
Model 257362.373 2 128681.187 Prob > F = 0.0000
Residual 106315.627 61 1742.87913 R-squared = 0.7077
Adj R-squared = 0.6981
Total 363678 63 5772.66667 Root MSE = 41.748

CM Coef. Std. Err. t P>|t| [95% Conf. Interval]

PGNP -.0056466 .0020033 -2.82 0.006 -.0096524 -.0016408


FLFP -2.231586 .2099472 -10.63 0.000 -2.651401 -1.81177
_cons 263.6416 11.59318 22.74 0.000 240.4596 286.8236
Cobb-Douglas Production Function
. reg lnGDP lnEmp lnCap

Source SS df MS Number of obs = 20


F(2, 17) = 1719.20
Model 2.75165006 2 1.37582503 Prob > F = 0.0000
Residual .01360456 17 .000800268 R-squared = 0.9951
Adj R-squared = 0.9945
Total 2.76525462 19 .145539717 Root MSE = .02829

lnGDP Coef. Std. Err. t P>|t| [95% Conf. Interval]

lnEmp .3397362 .1856928 1.83 0.085 -.0520414 .7315138


lnCap .8459951 .093352 9.06 0.000 .6490397 1.042951
_cons -1.652429 .6062017 -2.73 0.014 -2.931402 -.3734547
Restricted Least Squares(RLS)
• Let’s check whether there is CRS
– H0: 𝛽2 +𝛽3 =1, i.e. 𝛽2 =1 -𝛽3
Restricted Least Squares
. reg ln_OutLab ln_CapLab

Source SS df MS Number of obs = 20


F(1, 18) = 789.93
Model .729755205 1 .729755205 Prob > F = 0.0000
Residual .01662887 18 .000923826 R-squared = 0.9777
Adj R-squared = 0.9765
Total .746384075 19 .039283372 Root MSE = .03039

ln_OutLab Coef. Std. Err. t P>|t| [95% Conf. Interval]

ln_CapLab 1.0153 .0361244 28.11 0.000 .9394058 1.091195


_cons -.4947177 .1218165 -4.06 0.001 -.7506447 -.2387908
t- vs F-tests
• In a multiple regression, testing the individual
significance of a partial regression coefficient
(using the t test) and testing the overall
significance of the regression (i.e., H0: all
partial slope coefficients are zero or R2 = 0) are
not the same thing.

You might also like