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Assignment -Group 1

The document presents an econometrics assignment analyzing house prices using regression analysis. Key findings include an R-squared value of 67.24%, indicating a significant portion of variance explained by the model, while individual variables such as lot size and square footage significantly affect house prices. The analysis also identifies issues like heteroscedasticity and potential omitted variables, suggesting the model may need adjustments for more accurate interpretations.

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23 views14 pages

Assignment -Group 1

The document presents an econometrics assignment analyzing house prices using regression analysis. Key findings include an R-squared value of 67.24%, indicating a significant portion of variance explained by the model, while individual variables such as lot size and square footage significantly affect house prices. The analysis also identifies issues like heteroscedasticity and potential omitted variables, suggesting the model may need adjustments for more accurate interpretations.

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a32318721
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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TIS ABAY COLLEGE

PROJECT PLANNING MANAGEMENT


DEPARTMENT
ECONOMETRICS ASSIGNMENT

BY:
Yared simachew
Ageru Shita
Alemu
1. Checking Model Fit

• R-squared:, measures the proportion of variance in the dependent variable


(in this case, house prices) that can be explained by the independent
variables in the model (number of bedrooms, lot size, and square footage).

67.24% R-squared in this case means that 67.24% of the variation in house
prices is explained by the number of bedrooms, lot size, and square footage.

The remaining 32.76% is due to other factors not included in the model or
random noise.

Adjusted R-squared = 0.6607, slightly lower than R-squared, indicating that


the model's predictors are relevant but not overly complex.
Cont…
F-statistic: It determines whether the relationship
between the dependent variable and the independent
variables is statistically significant.

In the Given Model:

F-statistic: 57.46

p-value: 0.0000 < 0.05


This indicates the overall model is highly statistically
significant, meaning the predictors collectively explain
a significant portion of the variance in house prices.
2. Significance of Individual Variables (t-test)

The t-test in regression analysis evaluates whether each individual


predictor variable is statistically significant in explaining the variation
in the dependent variable. It assesses whether the coefficient of the
variable is significantly different from zero.
Bedrooms:
t-statistic = 1.54, p-value = 0.128 (greater than 0.05).
The number of bedrooms does not significantly affect house
prices.
Lot Size:
t-statistic = 3.22, p-value = 0.002 (less than 0.05).
Lot size has a significant positive effect on house prices.
Square Footage:
t-statistic = 9.28, p-value = 0.000 (less than 0.05).
Square footage has a highly significant positive effect on house
prices.
3. Checking Multicollinearity
Multicollinearity occurs when two or more independent variables in a
regression model are highly correlated. It undermines the reliability of the
estimated coefficients, making it difficult to determine the effect of each
predictor on the dependent variable.

Mean VIF = 1.28: Values below 10 indicate no severe multicollinearity.

Correlation Insights:
VIF values suggest that the independent variables are not highly
correlated.
4.Checking Heteroscedasticity
Heteroscedasticity refers to testing whether the variability of errors (residuals) in
a regression model is constant across observations. If the variance of residuals
changes, it violates the assumption of homoscedasticity, which is crucial for valid
hypothesis tests in regression analysis.

Breusch-Pagan Test Results

Null Hypothesis :The variance of residuals is constant (homoscedasticity).


Alternative Hypothesis :The variance of residuals is not constant
(heteroscedasticity).

Test Statistics:
chi2(1) = 20.55
p-value < 0.001
Conclusion:
The p-value is less than 0.05, so we reject the null hypothesis.
This indicates the presence of heteroscedasticity in the model.
5. Checking for the Omission of Important
Variables
Involves testing whether the regression model is missing critical predictors that
could explain the dependent variable. Missing important variables can lead to
omitted variable bias, distorting coefficient estimates and hypothesis tests.

Ramsey RESET Test Results


The Ramsey RESET (Regression Specification Error Test) is used to check for
model specification errors, including omitted variables.

Null Hypothesis: The model has no omitted variables (correctly specified).


Alternative Hypothesis :The model has omitted variables or is misspecified.
Test Statistics:
F(3, 81) = 4.26
p-value = 0.0076
Conclusion:
The p-value is less than 0.05, so we reject the null hypothesis.
This indicates that the model likely omits important variables or is misspecified.
Cont…
For house prices, potential omitted
variables might include:

• Location factors (e.g., proximity to


schools or commercial areas).
• Age of the property.
• Quality of construction or renovations.
• Neighborhood characteristics.
6.Interpreting Significant Variables After Solving
Issues
After addressing problems like heteroscedasticity, multicollinearity, and omitted
variable bias, you can interpret the coefficients of the significant variables with
greater confidence.
Cont…
Steps Taken to Solve Issues Before Interpretation
Cont…
Practical Implications

Policy Recommendations: If local policies aim to enhance property


values, they might focus on zoning for larger lots or promoting higher-
quality housing developments.

Real Estate Insights: Agents and developers can prioritize features like
square footage when pricing homes or planning new projects.

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