This section focuses on Chow Test and leaves general discussion on dummy variable models to other section.
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1 Jeeshim and KUCC65 (3//008) Statistical Inferences in Linear Regression: 7 4. Tests of Structural Changes This section focuses on Chow Test and leaves general discussion on dummy variable models to other section. 4.. Chow Test: Simple Example Chow Test examines whether parameters of one group of the data are equal to those of other groups. Simply put, the test checks whether the data can be pooled. If only intercepts are different across groups, this is a fixed effect model, which is simple to handle. Let us consider two groups. y α + βx + ε for all observations y α + βx + ε for n observations (group ) y α + β x + for n observations (group ) ε The null hypothesis is α α and β β. If the null hypothesis is rejected, two groups have different slopes and intercepts; data are not poolable. ( e' e ee ee ) / J ( SSE SSE SSE) J F( J, n + n K) where ( ee + ee ) /( n + n K) ( SSE + SSE) ( n + n K) e' e is the SSE of the pooled model and J is the number of restrictions (often equal to K all parameters). In order to conduct the Chow test,. Run pooled OLS to get SSE pooled. Run separate OLS to get SSE and SSE 3. Apply the formula In the following example, we assume that two groups have difference slopes of cost and different intercepts; there are two restrictions, J.. use clear (Cost of U.S. Airlines (Greene 003)). gen d(airline<). gen d0(d0). gen d(airline> & airline<4). gen d3 (airline>5). gen cost0cost*d0. gen costcost*d. gen costcost*d. gen cost3cost*d3 First, fit the pooled model. Greene 003 (89-9), If we want to test the null hypothesis that only intercept is different, J will be K- (all the slopes are equal)
2 Jeeshim and KUCC65 (3//008) Statistical Inferences in Linear Regression: 8. regress output cost // pooled model F(, 88) Model Prob > F Residual R-squared Adj R-squared Total Root MSE cost _cons And then fit separate models using two subsets of data.. regress output cost if d0 // if airline > 3 Source SS df MS Number of obs F(, 58) 34.5 Model Prob > F Residual R-squared Adj R-squared Total Root MSE.379 cost _cons regress output cost if d // if airline < Source SS df MS Number of obs F(, 8) 66.3 Model Prob > F Residual R-squared Adj R-squared Total Root MSE.987 cost _cons F ( e' e e e ee ) / J ( ) ( e e + e e ) /( n + n K) ( ) ( *) di (( )/)/(( )/(30+60-*)) di Ftail(,86,3.8745) 4.393e- The large F (, 68) rejects the null hypothesis of equal slope and intercept (p<.0000). Alternatively, you may regress y on two dummies and two interaction terms with the intercept suppressed. 3 Parameter estimates are identical to those of the above, while standard errors are 3 Therefore, R and standard errors are not reliable.
3 Jeeshim and KUCC65 (3//008) Statistical Inferences in Linear Regression: 9 different. This estimation is handy since parameter estimates are slopes and intercepts of individual groups; any further computation is not need at all.. regress output cost0 d0 cost d, noconstant F( 4, 86) 84.7 Model Prob > F Residual R-squared Adj R-squared Total Root MSE.6735 cost d cost d test _b[cost0]_b[cost] ( ) cost0 - cost 0 F(, 86) 3.03 Prob > F test _b[d0]_b[d], accum ( ) cost0 - cost 0 ( ) d0 - d 0 F(, 86) 3.87 Prob > F More convenient way is to regress y on a regressor of interest, cost, an interaction term, and a dummy with the intercept included. The intercept is the intercept of the baseline group and the dummy coefficient is the deviation from the baseline intercept. The coefficient of the regressor is the slope of the baseline, while the coefficient of the interaction term is the deviation of slope from the baseline slope. That is, the intercept of compared group is ( ) and the slope is.545 ( ).. regress output cost cost d F( 3, 86) Model Prob > F Residual R-squared Adj R-squared Total Root MSE.6735 cost cost d _cons test _b[cost]0 ( ) cost 0 F(, 86) 3.03 Prob > F
4 Jeeshim and KUCC65 (3//008) Statistical Inferences in Linear Regression: 0. test _b[d]0, accum ( ) cost 0 ( ) d 0 F(, 86) 3.87 Prob > F Chow Test: Comparing Three Groups What if we want to compare three groups? Let us fit two remaining models for group and 3. Restrictions here are ) slop is equal to the baseline slope (slop), ) slope3 is equal to the baseline slope, 3) intercept is equal to the baseline intercept, and 4) intercept3 is equal to the baseline intercept. Degrees of freedom is 84N-(group*K)90-3*.. regress output cost if d Source SS df MS Number of obs F(, 8) 43.0 Model Prob > F Residual R-squared Adj R-squared Total Root MSE.386 cost _cons regress output cost if d3 Source SS df MS Number of obs F(, 8) Model Prob > F Residual R-squared Adj R-squared Total Root MSE.0 cost _cons F ' ( e e ( e' e e e ee + e e + e e ) /( n 3 3 ' e3e3 ) / J ( ) 4 + n + n gk) ( ) ( * ) di (( )/4)/ /// (( )/( *)) di Ftail(4,84, ).696e-8 Now, include all interaction terms and dummies without the regressor of interest. The model report all parameter estimates, which are identical to the above.. regress output cost d cost d cost3 d3, noconstant F( 6, 84) Model Prob > F
5 Jeeshim and KUCC65 (3//008) Statistical Inferences in Linear Regression: Residual R-squared Adj R-squared Total Root MSE.075 cost d cost d cost d test _b[cost]_b[cost]_b[cost3], notest. test _b[d]_b[d]_b[d3], accum ( ) cost - cost 0 ( ) cost - cost3 0 ( 3) d - d 0 ( 4) d - d3 0 F( 4, 84) 39.4 Prob > F Finally, include the regresor, two interaction terms, and two dummies excluding baseline interaction and dummy. The coefficient of the regressor is the baseline slope and the intercept is the baseline intercept. Coefficients of interaction terms are deviations from the baseline slope. As a result, the slope of group is ( ) and the intercept is ( ).. regress output cost cost d cost d F( 5, 84) Model Prob > F Residual R-squared Adj R-squared Total Root MSE.075 cost cost d cost d _cons test _b[cost]0, notest. test _b[cost]0, accum notest. test _b[d]0, accum notest. test _b[d]0, accum ( ) cost 0 ( ) cost 0 ( 3) d 0 ( 4) d 0 F( 4, 84) 39.4 Prob > F Hypothesis testing is identical to the above Chow Test: Including Covariates
6 Jeeshim and KUCC65 (3//008) Statistical Inferences in Linear Regression: Now, suppose we need to include some covariates for control, load and fuel. We may regress the dependent variable on all interactions, dummies, and covariates with the intercept suppressed. Again R is not reliable here. A coefficient of an interaction term is the slope of cost of the group, just as the dummy coefficient is the intercept of the group.. regress output cost d cost d cost3 d3 load fuel, noconstant F( 8, 8) Model Prob > F Residual R-squared Adj R-squared Total Root MSE.408 cost d cost d cost d load fuel This model is written as, output *cost+.048*load-.4733*fuel (group ) output *cost+.048*load-.4733*fuel (group ) output *cost+.048*load-.4733*fuel (group 3) Let us conduct the hypothesis test for the four restrictions.. test _b[cost]_b[cost]_b[cost3], notest. test _b[d]_b[d]_b[d3], accum ( ) cost - cost 0 ( ) cost - cost3 0 ( 3) d - d 0 ( 4) d - d3 0 F( 4, 8) 0.86 Prob > F We may also fit the same model including the regressor of interest and excluding baseline interaction term and its intercept. Covariates remain unchanged. Note that slope is.0703 ( ) and the intercept of group is ( ).. regress output cost cost d cost d load fuel F( 7, 8) Model Prob > F Residual R-squared Adj R-squared Total Root MSE.408 cost cost d
7 Jeeshim and KUCC65 (3//008) Statistical Inferences in Linear Regression: 3 cost d load fuel _cons test _b[cost]0, notest. test _b[cost]0, accum notest. test _b[d]0, accum notest. test _b[d]0, accum ( ) cost 0 ( ) cost 0 ( 3) d 0 ( 4) d 0 F( 4, 8) 0.86 Prob > F Chow Test: Different Slopes of Multiple Regressors 4 If we assume that more than one regressor have different slopes across group, model will be complicated. But the underlying logic remains same. Let us create a set of interaction terms for the regressor load.. gen loadload*d. gen loadload*d. gen load3load*d3 First, include all interactions, dummies, and covariate fuel. Do not forget the suppress the intercept.. regress output cost load d cost load d cost3 load3 d3 fuel, noconstant F( 0, 80) Model Prob > F Residual R-squared Adj R-squared Total Root MSE.408 cost load d cost load d cost load d fuel test _b[cost]_b[cost]_b[cost3], notest. test _b[load]_b[load]_b[load3], accum notest. test _b[d]_b[d]_b[d3], accum ( ) cost - cost 0 ( ) cost - cost3 0 ( 3) load - load 0 4
8 Jeeshim and KUCC65 (3//008) Statistical Inferences in Linear Regression: 4 ( 4) load - load3 0 ( 5) d - d 0 ( 6) d - d3 0 F( 6, 80) 0.74 Prob > F 0.65 Now, include two regressors of interest, two sets of interactions, two dummies, and a covariate, excluding baseline interaction terms and its dummy. Make sure you include two regresors of interest, cost and load.. regress output cost load cost load d cost load d fuel F( 9, 80) Model Prob > F Residual R-squared Adj R-squared Total Root MSE.408 cost load cost load d cost load d fuel _cons test _b[cost]0, notest. test _b[cost]0, accum notest. test _b[load]0, accum notest. test _b[load]0, accum notest. test _b[d]0, accum notest. test _b[d]0, accum ( ) cost 0 ( ) cost 0 ( 3) load 0 ( 4) load 0 ( 5) d 0 ( 6) d 0 F( 6, 80) 0.74 Prob > F 0.65
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