ECON321Economic Analysis

Tutorial 8

Model selection

Introduction

• When you estimate multiple regression models the issues of over-fitting or under-fitting the model become important. Remember:o Start with the theory.o Draw on your experience.o Check what others have done.o Estimate the model and evaluate the results.

Look at the signs of the coefficients, the t-ratios, R2 and adjusted R2.

o Use the F-test to decide between restricted and unrestricted models.

Introduction

• This tutorial demonstrates the use of the Ramsey RESET test of model specification.

• This is a general test to detect functional form misspecification.

• And we use another version of the house price data to demonstrate how it can help you to choose between a level-level or log-log model.

Now that you know how to test the model specification, the following tutorial will show you how to test for multicollinearity.

Save your workfile and continue…