2022 Econometrics Chapter Three
2022 Econometrics Chapter Three
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3.5. Hypothesis Testing in Multiple Regression Model
• In multiple regression models we will undertake two
tests of significance.
𝟐
• If 𝑹 is low, there is no association between the
values of Y and the values predicted by the model,
𝑌 and the model does not fit the data well.
3.3.3 Adjusted Coefficient of Determination 𝑹𝟐
• One difficulty with 𝑹𝟐 is that it can be made large by adding
more and more variables, even if the variables added have no
economic justification.
• Algebraically, it is the fact that as the variables are added the
sum of squared errors (RSS) goes down (it can remain
unchanged, but this is rare) and thus 𝑹𝟐 goes up.
• If the model contains n-1 variables then 𝑹𝟐 = 1. The
manipulation of model just to obtain a high 𝑹𝟐 is not wise.
• An alternative measure of goodness of fit, called the adjusted 2