Scribd
Upload
275 views28 pages

Chapter 3

This document discusses multiple linear regression models. It begins by introducing multiple linear regression as a model with one dependent variable and two or more independent variables. It then outlines the assumptions of the multiple linear regression model and describes how to calculate coefficients, the coefficient of determination, standard errors, and tests of significance. An example is provided to illustrate these concepts using data on food consumption, price, and income. Key outputs of the example include significant negative and positive effects of price and income, respectively, on consumption.

Uploaded by

Hope Knock
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
275 views28 pages

Chapter 3

This document discusses multiple linear regression models. It begins by introducing multiple linear regression as a model with one dependent variable and two or more independent variables. It then outlines the assumptions of the multiple linear regression model and describes how to calculate coefficients, the coefficient of determination, standard errors, and tests of significance. An example is provided to illustrate these concepts using data on food consumption, price, and income. Key outputs of the example include significant negative and positive effects of price and income, respectively, on consumption.

Uploaded by

Hope Knock
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 28

SATA TECHNOLOGY AND BUSINESS COLLEGE (STBC)

Course: Introduction to Econometrics for


Business and Finance
Cr Hr: 3

Instructor: Alemayehu A. (Ass. Professor)

December, 2020

1
Lecture 2: Introduction to Econometrics

Welcome to Economics
Multiple Linear Regression Model

Wooldridge, Jeffrey M. (2010). Econometric Analysis of Cross Section and Panel


Data (2nd ed.). The MIT Press. Comprehensive, and formal as well as intuitive.

Angrist and Pischke (2009). Mostly Harmless Econometrics. Jazzy exposition,


reflects the new way of thinking about econometrics, based on the experimentalist
paradigm and the potential outcomes framework.

2
CHAPTER THREE

3. MULTIPLE LINEAR
REGRESSION MODEL

3
2. MULTIPLE LINEAR REGRESSION MODEL
2.1. Introduction :
So far we have seen the basic statistical tools and procedures
for analyzing relationships between two variables.
 But in practice, economic models generally contain one
dependent
variable and two or more independent variables. Such
models are called multiple regression models.
y = b0 + b1x1 + b2x2 + . . . bkxk + u

4
Cont’d
2.2. Model assumptions
Dependent variable: Y of size nx1
Independent (explanatory) variables: X 1 , X2, . . ., Xk each of size nx1

6. No multicollinearty: No exact linear relationship exists between any of the


explanatory variables.

7. Normality: ei are normally distributed with mean zero and constant variance for
5 all i
Cont’d
The only additional assumption here is that there is no
multicollinearity, meaning that there is no linear
dependence between the regressor variables X1 , X2, . . .,
Xk .
Under the above assumptions, ordinary least squares (OLS)
yields best linear unbiased estimators (BLUE) of b1,
b2 , . . ., bK .

6
Cont’d

Partially differentiating the ESS with respect to the


parameter :

7
Cont’d
Solving for the parameter :

8
Cont’d

Taking the square roots, we


9 obtain the standard errors
Cont’d
2.4. The coefficient of determination and test of model adequacy:
The coefficient of determination ( R2 ) can be calculated as usual
as:

R2measures the proportion of variation in the dependent variable Y


that is explained by the explanatory variables (or by the multiple
linear regression model). It is a goodness-of-fit statistic. A test for
the significance of R2 or a test of model adequacy is
accomplished by testing the hypotheses:
10
Cont’d

Where K is the number of parameters estimated from the sample


data (K = 3 in our case since we estimate b1 , b2 and b3 ) and n
is the sample size.
We say that the linear model is adequate in explaining the
relationship between the dependent variable and one or more of
11
the independent variables if:
Cont’d
Note:
As the number of explanatory (independent) variables
increases, R2 always increases. This implies that the
goodness-of-fit of an estimated model depends on the
number of independent (explanatory) variables regardless of
whether they are important or not.
To eliminate this dependency, we calculate the adjusted R2
(denoted by R2 ) as:

12
Cont’d
2.5. Tests on the regression coefficients
To test whether each of the coefficients are significant or
not, the null and alternative hypotheses are given by:

13
Illustrative example
Consider the following data on per capita food consumption
(Y), price of food ( X2 ) and per capita income ( X3 ) for
the years 1927-1941 in the United States. Retail price of food
and per capita disposable income are deflated by the
Consumer Price Index.
We want to fit a multiple linear regression model:

14
Cont’d
OLS estimates of the regression coefficients are

15
Cont’d

Decomposition of the sample variation of Y


The variation in the dependent variable Y can be decomposed into:
Total sum of squares = TSS =
Error sum of squares=ESS=
Regression sum of squares = RSS = TSS – ESS = 91.362
16
Cont’d
The coefficient of determination is thus:

R2 = 0.914 indicates that 91.4% of the variation (change) in


food consumption is attributed to the effect of food price and
consumer income.
1 - R2 = 0.086. This indicates that 8.6% of the variation in
food consumption is due to factors (variables) not included in
our specification.

17
Cont’d
Tests of model adequacy
Test of model adequacy is accomplished by testing the null
hypothesis:

The test statistic for this test is given by:

Compare this F ratio with tabulated one:

We reject H0 joint they are significant at 1% and 5%


18
Cont’d
Since the test statistic is greater than both tabulated values, the
above ratio is significant at the conventional levels of
significance (1% and 5%). Thus, we reject the null
hypothesis and conclude that the model is adequate, that is,
variation (change) in per capita food consumption is
significantly attributed to the effect of food price and/or
per capita disposable income.
Estimation of standard errors of estimated coefficients
The coefficient of correlation between X2 and X3 is
computed as:

19
Cont’d
Tests of significance of regression coefficients
a) Does food price significantly affect per capita food consumption?
The hypothesis to be tested is: we reject the
null hypothesis
and conclude
that food price
significantly
affects per
capita food
consumption at
b) Does disposable income significantly affect the 1% level of
per capita food consumption? Assignment significance.
20
Cont’d
Generally we have the following:
 Food price significantly and negatively affects per capita food
consumption, while disposable income significantly and
positively affects per capita food consumption.
 The estimated coefficient of food price is -0.21596. Holding
disposable income constant, a one dollar increase in food price
results in a 0.216 dollar decrease in per capita food consumption.
 The estimated coefficient of disposable income is 0.378127.
Holding food price constant, a one increase in disposable income
results in a 0.378 dollar increase in per capita food consumption.

Where X2 =food price X3 = disposable income


21
Cont’d

Stata Gives you the p-value


22
Cont’d

23
Cont’d

24
Cont’d

25
Cont’d

26
Cont’d
Too many or too few variables

27
28

You might also like