Christopher Dougherty

EC220 - Introduction to econometrics

(chapter 6)
Slideshow: f test of a linear restriction
Original citation:
Dougherty, C. (2012) EC220 - Introduction to econometrics (chapter 6). [Teaching Resource]
2012 The Author
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Available in LSE Learning Resources Online: May 2012
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F TEST OF A LINEAR RESTRICTION

S 1 2 ASVABC 3 SM 4 SF u

In the last sequence it was argued that educational attainment might be related to cognitive
ability and family background, with mother's and father's educational attainment proxying
for the latter.
1

F TEST OF A LINEAR RESTRICTION

. reg S ASVABC SM SF
Source |
SS
df
MS
-------------+-----------------------------Model | 1181.36981
3 393.789935
Residual | 2023.61353
536 3.77539837
-------------+-----------------------------Total | 3204.98333
539 5.94616574

Number of obs
F( 3,
536)
Prob > F
R-squared
Adj R-squared
Root MSE

=
=
=
=
=
=

540
104.30
0.0000
0.3686
0.3651
1.943

-----------------------------------------------------------------------------S |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------ASVABC |
.1257087
.0098533
12.76
0.000
.1063528
.1450646
SM |
.0492424
.0390901
1.26
0.208
-.027546
.1260309
SF |
.1076825
.0309522
3.48
0.001
.04688
.1684851
_cons |
5.370631
.4882155
11.00
0.000
4.41158
6.329681
------------------------------------------------------------------------------

However, when we run the regression using Data Set 21, we find the coefficient of mother's
education is not significant.
2

F TEST OF A LINEAR RESTRICTION

. reg S ASVABC SM SF
Source |
SS
df
MS
-------------+-----------------------------Model | 1181.36981
3 393.789935
Residual | 2023.61353
536 3.77539837
-------------+-----------------------------Total | 3204.98333
539 5.94616574

Number of obs
F( 3,
536)
Prob > F
R-squared
Adj R-squared
Root MSE

=
=
=
=
=
=

540
104.30
0.0000
0.3686
0.3651
1.943

-----------------------------------------------------------------------------S |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------ASVABC |
.1257087
.0098533
12.76
0.000
.1063528
.1450646
SM |
.0492424
.0390901
1.26
0.208
-.027546
.1260309
SF |
.1076825
.0309522
3.48
0.001
.04688
.1684851
_cons |
5.370631
.4882155
11.00
0.000
4.41158
6.329681
-----------------------------------------------------------------------------. cor SM SF
(obs=540)
|
SM
SF
--------+-----------------SM|
1.0000
SF|
0.6241
1.0000

As was noted in one of the sequences for Chapter 3, this might be due to multicollinearity,
because mother's education and father's education are correlated.
3

F TEST OF A LINEAR RESTRICTION

S 1 2 ASVABC 3 SM 4 SF u

In the discussion of multicollinearity, several measures for alleviating the problem were
suggested, among them the use of an appropriate theoretical restriction.
4

F TEST OF A LINEAR RESTRICTION

S 1 2 ASVABC 3 SM 4 SF u

4 3

In particular, in the case of the present model, it was suggested that the impact of parental
education might be the same for both parents, that is, that 3 and 4 might be equal.
5

F TEST OF A LINEAR RESTRICTION

S 1 2 ASVABC 3 SM 4 SF u

4 3
S 1 2 ASVABC 3 ( SM SF ) u
1 2 ASVABC 3 SP u

SP SM SF

If this is the case, the model may be rewritten as shown. We now have a total parental
education variable, SP, instead of separate variables for mothers and fathers education,
and the multicollinearity caused by the correlation between the latter has been eliminated.
6

F TEST OF A LINEAR RESTRICTION

. g SP=SM+SF
. reg S ASVABC SP
Source |
SS
df
MS
-------------+-----------------------------Model | 1177.98338
2 588.991689
Residual | 2026.99996
537 3.77467403
-------------+-----------------------------Total | 3204.98333
539 5.94616574

Number of obs
F( 2,
537)
Prob > F
R-squared
Adj R-squared
Root MSE

=
=
=
=
=
=

540
156.04
0.0000
0.3675
0.3652
1.9429

-----------------------------------------------------------------------------S |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------ASVABC |
.1253106
.0098434
12.73
0.000
.1059743
.1446469
SP |
.0828368
.0164247
5.04
0.000
.0505722
.1151014
_cons |
5.29617
.4817972
10.99
0.000
4.349731
6.242608
------------------------------------------------------------------------------

Here is the regression with SP replacing SM and SF.

F TEST OF A LINEAR RESTRICTION

. reg S ASVABC SM SF
-----------------------------------------------------------------------------S |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------ASVABC |
.1257087
.0098533
12.76
0.000
.1063528
.1450646
SM |
.0492424
.0390901
1.26
0.208
-.027546
.1260309
SF |
.1076825
.0309522
3.48
0.001
.04688
.1684851
_cons |
5.370631
.4882155
11.00
0.000
4.41158
6.329681
-----------------------------------------------------------------------------. reg S ASVABC SP
-----------------------------------------------------------------------------S |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------ASVABC |
.1253106
.0098434
12.73
0.000
.1059743
.1446469
SP |
.0828368
.0164247
5.04
0.000
.0505722
.1151014
_cons |
5.29617
.4817972
10.99
0.000
4.349731
6.242608
------------------------------------------------------------------------------

A comparison of the regressions reveals that the standard error of the coefficient of SP is
much smaller than those of SM and SF, and consequently its t statistic is higher. Its
coefficient is a compromise between those of SM and SF, as might be expected.
8

F TEST OF A LINEAR RESTRICTION

. reg S ASVABC SM SF
-----------------------------------------------------------------------------S |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------ASVABC |
.1257087
.0098533
12.76
0.000
.1063528
.1450646
SM |
.0492424
.0390901
1.26
0.208
-.027546
.1260309
SF |
.1076825
.0309522
3.48
0.001
.04688
.1684851
_cons |
5.370631
.4882155
11.00
0.000
4.41158
6.329681
-----------------------------------------------------------------------------. reg S ASVABC SP
-----------------------------------------------------------------------------S |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------ASVABC |
.1253106
.0098434
12.73
0.000
.1059743
.1446469
SP |
.0828368
.0164247
5.04
0.000
.0505722
.1151014
_cons |
5.29617
.4817972
10.99
0.000
4.349731
6.242608
------------------------------------------------------------------------------

However, the use of a restriction will lead to a gain in efficiency only if the restriction is
valid. If it is not valid, its use will lead to biased coefficients and invalid standard errors and
tests.
9

F TEST OF A LINEAR RESTRICTION

. reg S ASVABC SM SF
-----------------------------------------------------------------------------S |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------ASVABC |
.1257087
.0098533
12.76
0.000
.1063528
.1450646
SM |
.0492424
.0390901
1.26
0.208
-.027546
.1260309
SF |
.1076825
.0309522
3.48
0.001
.04688
.1684851
_cons |
5.370631
.4882155
11.00
0.000
4.41158
6.329681
-----------------------------------------------------------------------------. reg S ASVABC SP
-----------------------------------------------------------------------------S |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------ASVABC |
.1253106
.0098434
12.73
0.000
.1059743
.1446469
SP |
.0828368
.0164247
5.04
0.000
.0505722
.1151014
_cons |
5.29617
.4817972
10.99
0.000
4.349731
6.242608
------------------------------------------------------------------------------

Do the coefficients of SM and SF in the unrestricted regression look as if they satisfy the
restriction? Not really, in this case. The coefficient of SM is much smaller than that of SF,
but then it should be noted that the standard errors are quite large.
10

F TEST OF A LINEAR RESTRICTION

. reg S ASVABC SM SF
Source |
SS
df
MS
-------------+-----------------------------Model | 1181.36981
3 393.789935
Residual | 2023.61353
536 3.77539837
-------------+-----------------------------Total | 3204.98333
539 5.94616574

Number of obs
F( 3,
536)
Prob > F
R-squared
Adj R-squared
Root MSE

=
=
=
=
=
=

540
104.30
0.0000
0.3686
0.3651
1.943

Number of obs
F( 2,
537)
Prob > F
R-squared
Adj R-squared
Root MSE

=
=
=
=
=
=

540
156.04
0.0000
0.3675
0.3652
1.9429

. reg S ASVABC SP
Source |
SS
df
MS
-------------+-----------------------------Model | 1177.98338
2 588.991689
Residual | 2026.99996
537 3.77467403
-------------+-----------------------------Total | 3204.98333
539 5.94616574

We will now perform a proper test. The imposition of a restriction makes it more difficult for
the regression model to fit the data because there is one fewer parameter to adjust. There
will therefore be an increase in RSS (and a decrease in R2) when it is imposed.
11

F TEST OF A LINEAR RESTRICTION

. reg S ASVABC SM SF
Source |
SS
df
MS
-------------+-----------------------------Model | 1181.36981
3 393.789935
Residual | 2023.61353
536 3.77539837
-------------+-----------------------------Total | 3204.98333
539 5.94616574

Number of obs
F( 3,
536)
Prob > F
R-squared
Adj R-squared
Root MSE

=
=
=
=
=
=

540
104.30
0.0000
0.3686
0.3651
1.943

Number of obs
F( 2,
537)
Prob > F
R-squared
Adj R-squared
Root MSE

=
=
=
=
=
=

540
156.04
0.0000
0.3675
0.3652
1.9429

. reg S ASVABC SP
Source |
SS
df
MS
-------------+-----------------------------Model | 1177.98338
2 588.991689
Residual | 2026.99996
537 3.77467403
-------------+-----------------------------Total | 3204.98333
539 5.94616574

If the restriction is valid, the deterioration in the fit should be a small, random amount.
However, if the restriction is invalid, the distortion caused by its imposition will lead to a
significant deterioration in the fit.
12

F TEST OF A LINEAR RESTRICTION

. reg S ASVABC SM SF
Source |
SS
df
MS
-------------+-----------------------------Model | 1181.36981
3 393.789935
Residual | 2023.61353
536 3.77539837
-------------+-----------------------------Total | 3204.98333
539 5.94616574

Number of obs
F( 3,
536)
Prob > F
R-squared
Adj R-squared
Root MSE

=
=
=
=
=
=

540
104.30
0.0000
0.3686
0.3651
1.943

Number of obs
F( 2,
537)
Prob > F
R-squared
Adj R-squared
Root MSE

=
=
=
=
=
=

540
156.04
0.0000
0.3675
0.3652
1.9429

. reg S ASVABC SP
Source |
SS
df
MS
-------------+-----------------------------Model | 1177.98338
2 588.991689
Residual | 2026.99996
537 3.77467403
-------------+-----------------------------Total | 3204.98333
539 5.94616574

In the present case, we can see that the increase in RSS is very small, and hence we are
unlikely to reject the restriction.
13

F TEST OF A LINEAR RESTRICTION

S 1 2 ASVABC 3 SM 4 SF u

4 3
S 1 2 ASVABC 3 ( SM SF ) u
1 2 ASVABC 3 SP u

SP SM SF
H 0 : 4 3 , H1 : 4 3

The null hypothesis is that the restriction is valid, and the alternative one is that it is invalid.

14

F TEST OF A LINEAR RESTRICTION

S 1 2 ASVABC 3 SM 4 SF u

4 3
S 1 2 ASVABC 3 ( SM SF ) u
1 2 ASVABC 3 SP u

SP SM SF
H 0 : 4 3 , H1 : 4 3
( RSS R RSSU ) / 1 2027.00 2023.61
F (1, n k )

0.90
RSSU /(n k )
2023.61 / 536
The test statistic is a member of the family of F tests where the numerator is the
improvement in the fit on relaxing the restriction, divided by the cost of relaxing it (one
degree of freedom, because one additional parameter has to be estimated).
15

F TEST OF A LINEAR RESTRICTION

S 1 2 ASVABC 3 SM 4 SF u

4 3
S 1 2 ASVABC 3 ( SM SF ) u
1 2 ASVABC 3 SP u

SP SM SF
H 0 : 4 3 , H1 : 4 3
( RSS R RSSU ) / 1 2027.00 2023.61
F (1, n k )

0.90
RSSU /(n k )
2023.61 / 536
The denominator of the test statistic is RSS after making the improvement (that is, RSS for
the unrestricted model), divided by n k, the number of degrees of freedom remaining. k is
the number of parameters in the unrestricted model.
16

F TEST OF A LINEAR RESTRICTION

S 1 2 ASVABC 3 SM 4 SF u

4 3
S 1 2 ASVABC 3 ( SM SF ) u
1 2 ASVABC 3 SP u

SP SM SF
H 0 : 4 3 , H1 : 4 3
( RSS R RSSU ) / 1 2027.00 2023.61
F (1, n k )

0.90
RSSU /(n k )
2023.61 / 536
The F statistic is 0.90. An F statistic below 1 is never significant (look at the F table), so we
do not reject H0. The restriction appears to be valid. At least, it is not rejected by the data.
17

Copyright Christopher Dougherty 2011.

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Introduction to Econometrics, fourth edition 2011, Oxford University Press.
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11.07.25