![Page 1: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/1.jpg)
1
Hypothesis Testing UnderGeneral Linear Model
Previously we derived the sampling property results assuming normality:Y = X + e where et~N(0,2)→ Y~N(X,2IT)s=(X'X)-1X'Y, E(s)=Cov(s)= β =2(X'X)-1
l~N(, 2(X'X)-1)σU
2 unbiased estimate of σ2
An estimate of Cov(βs) = βs=σU
2(X'X)-1
2 l lU
e eσ =
(T-K)
el = y - Xβl
![Page 2: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/2.jpg)
2
Hypothesis Testing UnderGeneral Linear Model
Single Parameter (βk,L) Hypothesis Test βk,l~N(βk,Var(βk))
kth diagonal element of βs
When σ2 is known:
( )
, ~ (0,1)var
k l k
k
z Nb b
b
-=
unknown true coeff.
When σ2 not known:
( )
, ~ˆvar
k l kT K
k
t tb b
b-
-=
Σβs=σu2(X'X)-1
![Page 3: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/3.jpg)
3
Hypothesis Testing UnderGeneral Linear Model
Can obtain (1-) CI for βk:
There is a (1-α) probability that the true unknown value of β is within this range
Does this interval contain our hypothesized value? If it does, than we can not reject H0
( )
( )
k,l k α 2,T-K k
k,l k α 2,T-K
ˆβ - var β t β
ˆβ + var β t
£
£
![Page 4: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/4.jpg)
4
Hypothesis Testing UnderGeneral Linear Model
Testing More Than One Linear Combination of Estimated Coefficients Assume we have a-priori
information about the value of β
We can represent this information via a set of J-Linear hypotheses (or restrictions):
In matrix notation
K
jk k jk=1
R β = r j=1,2,…,J (J K)
(JxK) (Jx1)(Kx1)R β = r
![Page 5: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/5.jpg)
5
Hypothesis Testing UnderGeneral Linear Model
(JxK) (Jx1)(Kx1)R β = r
11 12 1
21 22 2
1 2
K
k
J J JK
R R R
R R RR
R R R
1
2
J
r
rr
r
knowncoefficients
![Page 6: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/6.jpg)
6
Hypothesis Testing UnderGeneral Linear Model
Assume we have a model with 5 parameters to be estimatedJoint hypotheses: β1=8 and β2=β3
J=2, K=5
0
1
2
3
4
0 1 0 0 0 8
0 0 1 1 0 0
0 1 0 0 0 8
0 0 1 1 0 0
R r
R r
β2-β3=0
![Page 7: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/7.jpg)
7
Hypothesis Testing UnderGeneral Linear Model
How do we obtain parameter estimates if J hypotheses are true? Constrained (Restricted) Least
Squares R is β that minimizes: S=(Y-Xβ)'(Y-Xβ) s.t. Rβ=r
= e'e s.t. Rβ=re.g. we act as if H0 are true
S*=(Y-Xβ)'(Y-Xβ)+λ'(r-Rβ) λ is (J x1) Lagrangian multipliers
associated with J-joint hypotheses We want to choose β such that we
minimize SSE but also satisfy the J constraints (hypotheses), βR
![Page 8: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/8.jpg)
8
Hypothesis Testing UnderGeneral Linear Model
Min. S*=(Y-Xβ)'(Y-Xβ) + λ'(r-Rβ)
What and how many FOC’s? K+J FOC’s
1
* * *0
K
S S S
K-FOC’s
*0
Sr R
J-FOC’s
![Page 9: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/9.jpg)
9
Hypothesis Testing UnderGeneral Linear Model
What are the FOC’s?
( 1)
-1 -1R
*-2X Y + 2X Xβ - R λ 0
move -2X Y and -R λ to RHS
and divide by 2
R λX Xβ = X Y +
2R λ
β = X X X Y + X X2
Kx
S
Substitute these FOC into 2nd set∂S*/∂λ = (r-RβR) = 0J →
-1sR λ
r = Rβ + R X X2
S*=(Y-Xβ)'(Y-Xβ)+λ'(r-Rβ)
CRM
βS
![Page 10: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/10.jpg)
10
Hypothesis Testing UnderGeneral Linear Model
-1s
-1-1s
λr-Rβ = R X X R 2
λ = R X X R r-Rβ2
The 1st FOC
Substitute the expression for λ/2 into the 1st FOC:
R s
1-1 -1sX X R R X X R r-Rβ
1 1 RX X X Y X X
2R
![Page 11: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/11.jpg)
11
Hypothesis Testing UnderGeneral Linear Model
βR is the restricted LS estimator of β as well as the restricted ML estimator
Properties of Restricted Least Squares Estimator
→E(R) if R rV(R) ≤ V(S)
→[V(S) - V(R)] is positive semi-definite
diag(V(R)) ≤ diag(V(S))
R
1-1 -1
E
X X R R X X R r-Rβ
True butUnknown Value
![Page 12: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/12.jpg)
12
Hypothesis Testing UnderGeneral Linear Model
From above, if Y is multivariate normal and H0 is true βl,R~N(β,σ2M*(X'X)-1M*')
~N(β,σ2M*(X'X)-1)
From previous results, if r-Rβ≠0 (e.g., not all H0 true), estimate of β is biased if we continue to assume r-Rβ=0
,
11 1
Bias l RE
X X R R X X R r R
≠0
11 1*
KM I X X R R X X RR
![Page 13: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/13.jpg)
13
Hypothesis Testing UnderGeneral Linear Model
The variance is the same regardless of he correctness of the restrictions and the biasedness of βR → βR has a variance that is smaller
when compared to βs which only uses the sample information.
![Page 14: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/14.jpg)
14
Hypothesis Testing UnderGeneral Linear Model
Beer Consumption Example : qB ≡ quantity of beer purchased
PB ≡ price of beerPL ≡ price of other alcoholic bev.PO≡ price of other goodsINC ≡ household income
Real Prices Matter? All prices and INC by 10% β1 + β2 + β3 + β4=0
Equal Price Impacts? Liquor and Other Goods β2=β3
Unitary Income Elasticity? β4=1
Data used in the analysis
ββ β β31 2 4B B L Oq =αP P P INC exp( )e
![Page 15: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/15.jpg)
15
Given the above, what does the R-matrix and r vector look like for these joint tests?
Lets develop a test statistic to test these joint hypotheses
We are going to use the Likelihood Ratio (LR) to test the joint hypotheses
Hypothesis Testing UnderGeneral Linear Model
0 1 1 1 1 0
0 0 1 1 0 0
0 0 0 0 1 1
R r
B,t 0 1 B,t 2 L,t
3 O,t 4 t t
lnq =β +β ln(P )+β ln(P )
+β ln(P )+β ln(Inc )+e
![Page 16: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/16.jpg)
16
Hypothesis Testing UnderGeneral Linear Model
LR=lU*/lR
*
lU*=Max [l(|y1,…,yT);
=(β, σ) ]= “unrestricted” maximum likelihood function
lR*=Max [l(|y1,…,yT);
=(β, σ); Rβ=r]= “restricted” maximum likelihood function
Again, because we are possibly restricting the parameter space via our null hypotheses, LR≥1
![Page 17: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/17.jpg)
17
Hypothesis Testing UnderGeneral Linear Model
If lU* is large relative to lR
*→data shows evidence that the restrictions (hypotheses) are not true (e.g., reject null hypothesis) How much should LR exceed 1
before we reject H0? We reject H0 when LR ≥ LRC where
LRC is a constant chosen on the basis of the relative cost of the Type I vs. Type II errors
When implementing the LR Test you need to know the PDF of the dependent variable which determines the density of the test statistic
![Page 18: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/18.jpg)
18
Hypothesis Testing UnderGeneral Linear Model
For LR test, assume Y has a normal distribution →e~N(0,σIT) This implies the following LR
test statistic (LR*) What are the distributional
characteristics of LR*? Will address this in a bit
![Page 19: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/19.jpg)
19
Hypothesis Testing UnderGeneral Linear Model
We can derive alternative specifications of LR test statistic LR*=(SSER-SSEU)/(J2U)
(ver. 1) LR*=[(Re-r)′[R(X′X)-1R′]-1(Re-r)]/(J2U)
(ver. 2) LR*=[(R-e)′(X′X)(R-e)]/(J2U)
(ver. 3)βe =βS=βl
What are the Distributional Characteristics of LR* (JHGLL p. 255) LR* ~ FJ,T-K
J = # of Hypotheses K= # of Parameters (including intercept)
![Page 20: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/20.jpg)
20
Hypothesis Testing UnderGeneral Linear Model
Proposed Test Procedure Choose = P(reject H0| H0 true) =
P(Type-I error) Calculate the test statistic LR*
based on sample information Find the critical value LRcrit in an F-
table such that: = P(F(J, T – K) LRcrit), where α =
P(reject H0| H0 true)f(LR*)
αLRcrit
α = P(FJ,T-K ≥ LRcrit)
![Page 21: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/21.jpg)
21
Hypothesis Testing UnderGeneral Linear Model
Proposed Test Procedure Choose = P(reject H0| H0 true) =
P(Type-I error) Calculate the test statistic LR*
based on sample information Find the critical value LRcrit in an F-
table such that: = P(F(J, T – K) LRcrit), where α =
P(reject H0| H0 true) Reject H0 if LR* LRcrit
Don’t reject H0 if LR* < LRcrit
![Page 22: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/22.jpg)
22
Hypothesis Testing UnderGeneral Linear Model
Beer Consumption Example
Does the regression do a better job in explaining variation in beer consumption than if assumed the mean response across all obs.? Remember SSE=(T-K)σ2
U
Under H0: All slope coefficients=0
Under H0, TSS=SSE given that that there is no RSS and TSS=RSS+SSE
B,t 0 1 B,t 2 L,t
3 O,t 4 t t
lnq =β +β ln(P )+β ln(P )
+β ln(P )+β ln(Inc )+e
![Page 23: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/23.jpg)
23
Hypothesis Testing UnderGeneral Linear Model
Log-Log Beer Consumption Model
Unconstrained Model
R2 0.8254
Adj. R2 0.7975
σU 0.05997
Obs 30
Variable Coeff Std Error T-Stat
Intercept -3.243 3.743 -0.87
lnPB -1.020 0.239 -4.27
lnPL -0.583 0.560 -1.04
lnPO 0.210 0.080 2.63
ln(INC) 0.923 0.416 2.22
Constrained Model
σU 0.13326 SSER=0.133262*29=0.51497
Coeff Std Error T-Stat
Intercept 4.019 0.0243 165.17
SSE = 0.059972 *25 = 0.08992
R2=1- 0.08992/0.51497
TSS=SSERMean of LN(Beer)
![Page 24: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/24.jpg)
24
Hypothesis Testing UnderGeneral Linear Model
Results of our test of overall significance of regression model
Lets look at the following GAUSS Code
GAUSS command:CDFFC(29.544,4,25)=3.799e-009CDFFC Computes the complement
of the cdf of the F distribution (1-Fdf1,df2)
Unlikely value of F if hypothesis is true, that is no impact of exogenous variables on beer consumption
Reject the null hypothesisAn alternative look
![Page 25: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/25.jpg)
25
Hypothesis Testing UnderGeneral Linear Model
Beer Consumption Example
Three joint hypotheses exampleSum of Price and Income
Elasticities Sum to 0 (e.g., β1 + β2 + β3 + β4=0)Other Liquor and Other Goods
Price Elasticities are Equal (e.g., β2=β3)
Income Elasticity = 1 (e.g., β4=1) cdffc(0.84,3,25)=0.4848
B,t 0 1 B,t 2 L,t
3 O,t 4 t t
lnq =β +β ln(P )+β ln(P )
+β ln(P )+β ln(Inc )+e
![Page 26: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/26.jpg)
26
Hypothesis Testing UnderGeneral Linear Model
F3,25
0.84
area = 0.4848
Location of our calculated test statistic
F
![Page 27: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/27.jpg)
27
Hypothesis Testing UnderGeneral Linear Model
A side note: How do you estimate the variance of an elasticity and therefore test H0 about this elasticity?
Suppose you have the following model:FDXt = β0 + β1Inct + β2 Inc2
t + et
FDX= food expenditure Inc=household income
Want to estimate the impacts of a change in income on expenditures. Use an elasticity measure evaluated at mean of the data. That is:
![Page 28: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/28.jpg)
28
Hypothesis Testing UnderGeneral Linear Model
Income Elasticity (Γ) is:
How do you calculate the variance of Γ?
We know that: Var(α′Z)= α′Var(Z)α Z is a column vector of RV’s α a column vector of constants
Treat β0, β1 and β2 are RV’s. The α vector is:
1 2FDX Inc Inc
2 IncInc FDX FDX
2Inc 2Inc
α 0FDX FDX
FDXt = β0 + β1Inct + β2 Inc2t + et
Linear combination of Z
![Page 29: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/29.jpg)
29
Hypothesis Testing UnderGeneral Linear Model
This implies var(Γ) is:
2 0 0 1 0 2
0 1 1 1 2
0 2 1 2 2 2
0Var β Cov β ,β Cov β ,β
Inc 2Inc Inc0 Cov β ,β Var β Cov β ,β
FDX FDX FDXCov β ,β Cov β ,β Var β
2Inc
FDX
21 1 2
21 2 2
(2 2)(1 2)
(2 1)
Inc
Var β Cov β ,β FDXInc 2Inc
Cov β ,β Var βFDX FDX 2Inc
FDXxx
x
(1 x 1)
σ2(X'X)-1
(3 x 3)
(1 x 3)
(3 x 1)Due to 0 α value
![Page 30: 1 Hypothesis Testing Under General Linear Model Previously we derived the sampling property results assuming normality: Y = X + e where e t ~N(0,](https://reader036.vdocuments.pub/reader036/viewer/2022062518/5697bf871a28abf838c88c11/html5/thumbnails/30.jpg)
30
Hypothesis Testing UnderGeneral Linear Model
This implies: var(Γ) is:
22 2
1 2
2
1 2
Inc 2IncVar Var β Var β
FDX FDX
Inc 2Inc2 Cov β ,β
FDX FDX
C12
C22
22 2
1 2
3
1 22
Inc 2IncVar β Var β
FDX FDX
Inc4 Cov β ,β
FDX
2C1C2