Hypothesis Testing Flashcards
What is the null hypothesis H0 in a t-test for regression?
H0: Beta = 0, testing whether the independent variable has no effect on the dependent variable.
What does a p-value represent in hypothesis testing?
The p-value is the probability of obtaining a test statistic as extreme as the one observed, assuming the null hypothesis is true.
What is a confidence interval in the context of OLS regression?
A confidence interval provides a range within which the true population parameter Beta is likely to lie, typically at the 95% confidence level.
How does hypothesis testing distinguish between economic and statistical significance?
Economic significance refers to the size of the effect, while statistical significance tests whether the effect is likely different from zero, based on hypothesis tests.
What are Type 1 and Type 2 errors in hypothesis testing?
Type 1 error - Rejecting a true null hypothesis (False positive)
Type 2 error - Failing to reject a false null hypothesis (false negative)
What is the extra assumption of normality in hypothesis testing for OLS?
The normality assumption states that the error term u is normally distributed ( u ~ N(0, Variance) )
This assumption allows the OLS estimator beta to be normally distributed, enabling valid hypothesis testing using the t-test.
How do you interpret the result of a t-test?
The t-test compares the estimated coefficient Beta to its hypothesized value (zero) and tests whether the difference is statistically significant. If the absolute value of the t-statistic exceeds the critical value, you reject the null hypothesis.
How do you interpret a p-value in hypothesis testing?
The p-value represents the probability of obtaining a t-statistic as extreme as the one observed, assuming the null hypothesis is true. A small p-value indicates strong evidence against the null hypothesis.
