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Introduction To Econometrics: Bivariate Regression Models

This document discusses bivariate regression models and interpreting regression output. It introduces the simple linear regression model of Yi = b0 + b1Xi + ui and explains how to interpret parameters like the intercept, R-squared, standard errors, t-values and p-values from regression output. It provides an example of fictitious sales and advertising data and the regression results in a spreadsheet. It also discusses using the model for forecasting and how the standard error of forecasts depends on factors like the sample size and variation in the independent variable.

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82 views

Introduction To Econometrics: Bivariate Regression Models

This document discusses bivariate regression models and interpreting regression output. It introduces the simple linear regression model of Yi = b0 + b1Xi + ui and explains how to interpret parameters like the intercept, R-squared, standard errors, t-values and p-values from regression output. It provides an example of fictitious sales and advertising data and the regression results in a spreadsheet. It also discusses using the model for forecasting and how the standard error of forecasts depends on factors like the sample size and variation in the independent variable.

Uploaded by

rimzha
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 21

Introduction to Econometrics

Lecture2
Bivariate regression models

 Interpreting least squares regression


results: goodness of fit and significance
tests
 Forecasting with a simple regression
model

ECONMET [U13783] Guy Judge February 2010


Recommended reading

 DOUGHERTY Introduction to Econometrics


Chapter 2
OR
 GUJARATI, D N and PORTER, D C Basic
Econometrics Chapters 2 & 3

ECONMET [U13783] Guy Judge February 2010


Interpreting basic regression output
 Parameter estimates (constant intercept and X
coefficient)
 Degrees of freedom
 The ANOVA table and Sums of Squares
 R squared
 Standard Error of the Y Estimate (SEE)
 Standard error of the X-coefficient
 t-values
 P values and significance levels
 Confidence intervals

ECONMET [U13783] Guy Judge February 2010


Format of the simple linear regression model

 We write the simple linear regression


model as

Yi = b0 + b1 Xi + ui for i = 1,2,...,n

 where Y is the dependent variable


 X is the independent variable
 and u is the error or disturbance term
ECONMET [U13783] Guy Judge February 2010
Least squares regression results

Computer regression software will generate sample values for the least
squares estimates ̂ 0 and ˆ1 together with a lot of additional statistical
output.
Note: we use the term ESTIMATOR for the function (e.g. ˆ1 
 xy
x 2

and ESTIMATE for the actual value that we get when we put sample
data on X and Y into this formula.

ECONMET [U13783] Guy Judge February 2010


Some (fictitious) sales-advertising data
 Observation Sales(Y) Advertising(X)
 1 36 56.7
 2 48 63.9
 3 45 62.7
 4 40 59.7
 5 30 55.9
 6 56 68.7
 7 63 69.2
 8 53 65.5
 9 61 69.4
 10 68 73.4
 11 66 74.1
 12 65 74.4
• NOTE: Both variables are measured in thousands of dollars

ECONMET [U13783] Guy Judge February 2010


The sales-advertising model on a
spreadsheet: regression output

Fictitious sales and advertising data - results from Excel


SUMMARY OUTPUT

Re g r e s s i o n S t a t i s t i cs
Mu l t i p l e R 0. 983130884
R Sq u a r e 0. 966546336
Ad j u s t e d R Sq u a r e 0. 963200969
St a n d a r d Er r o r 2. 443603959
Ob s e r v a t i o n s 12

ANOVA
df SS MS F Si gni f i c anc e F
Re g r e s s i o n 1 1725. 204664 1725. 205 288. 9209 1 . 0 4 5 8 3 E- 0 8
Re s i d u a l 10 59. 71200311 5. 9712
To t a l 11 1784. 916667

Co e f f i c i e n t s S t a n d a r d Er r o r t St at P- v a l u e Lo we r 9 5 % Up p e r 9 5 %
I nt e r c e pt - 75. 00001438 7 . 5 3 9 0 0 4 1 2 2 - 9 . 9 4 8 2 7 1 . 6 7 E- 0 6 - 91. 79796528 - 58. 2020635
X Va r i a b l e 1 1. 929183685 0 . 1 1 3 4 9 6 9 2 3 1 6 . 9 9 7 6 7 1 . 0 5 E- 0 8 1. 676296737 2. 182070633

ECONMET [U13783] Guy Judge February 2010


Are the coefficient estimates plausible?

 The results here show an estimated


intercept of -75 and a slope (X) coefficient of
just under 2
 What do you think about these values?
 Are they significantly different from zero?
 How good is the fit?

ECONMET [U13783] Guy Judge February 2010


Spreadsheet graph for the sales-ads model
Scatter diagram of sales v ads with
fitted regression line

80
70
sales (Y)

60
50
40
30
20
50 55 60 65 70 75 80
ads (X)
ECONMET [U13783] Guy Judge February 2010
Analysis of Variance (ANOVA) and Sums of Squares

As you can see from the ANOVA table we can decompose the Total Sum
of Squares (of the dependent variable Y around its mean) into two parts:
• the Explained (or Regression) Sum of Squares and
• the Residual Sum of Squares.

Total Sum of Squares =


Explained Sum of Squares + Residual Sum of Squares

 (Y  Y ) 2
  (Yˆ  Y ) 2   (Y  Yˆ ) 2

Or in terms of deviations from the mean

 y 2
  yˆ 2   uˆ 2

ECONMET [U13783] Guy Judge February 2010


Goodness of fit: R squared (the Coefficient of determination)
We can now define the Coefficient of Determination or R squared
as the proportion of the Total Variation of the dependent variable (around its mean)
which can be explained by, or attributed to, the regression.

R2 
 yˆ 2 R2  1
 ˆ
u 2

 y 2
y 2

Or, as the second equation has it (1 – the proportion of the variation that is not explained
by the regression).

R squared is taken as a measure of the “ goodness of fit” of the regression.

0  R2  1
The closer to 1 is R squared, the better the fit.

ECONMET [U13783] Guy Judge February 2010


The Standard Error of the Y Estimate

ECONMET [U13783] Guy Judge February 2010


The Standard Error of the X coefficient

ECONMET [U13783] Guy Judge February 2010


ECONMET [U13783] Guy Judge February 2010
ECONMET [U13783] Guy Judge February 2010
ECONMET [U13783] Guy Judge February 2010
ECONMET [U13783] Guy Judge February 2010
Forecasting using the simple regression model (1)

Once a model has been estimated (and carefully


validated using economic and statistical tests) it can be
used for prediction or forecasting.
For example our estimated relationship between sales
and ads is (approximately) sales = -75 + 1.929 ads +
residual
We can use this to predict sales for some particular level
of advertising, say ads = 70
The disturbance term is assumed to take its expected
value so we put the residual = 0.

ECONMET [U13783] Guy Judge February 2010


Forecasting using the simple regression model (2)

sales(ads=70) = -75 + 1.9292 * 70 = 60.04

This is just a point forecast. We can create a


forecast confidence interval by taking
95% forecast interval = point forecast  sF  tn-2, 0.025

Here that would give 60.04  2.58097 * 2.228 =


60.04  5.75 i.e. [54.29, 65.79]

ECONMET [U13783] Guy Judge February 2010


Forecasting using the simple regression model (3)

This interval is quite large because it is based on


a rather small sample. Hence both sF and
tn-2, 0.025 will be fairly large.

Forecasts based on larger samples will be more


precise.

ECONMET [U13783] Guy Judge February 2010


More on the standard error of the forecast

The formula for SF (for the simple bivariate model) is


-1 2 2
SF =  u   [ 1 + n + (XF - X ) /  (Xi - X ) ]

Notice that SF is smaller


 the smaller is  u
 the closer is XF to the sample mean X
 the greater is the sample size n
 the greater is the in sample variation in X

ECONMET [U13783] Guy Judge February 2010

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