Week 6 Assignments

Statistics

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Assignment #4: Model Diagnostics

A fundamental requirement in the classical linear regression is that the regression error term must be normally distributed with zero mean and constant variance (Greene, 2008). The normality tests results are presented below.

All the plots have values greater than the threshold probability value of 0.05 thus the null hypothesis of normality of the regression residuals could not be rejected at 5 per cent significance level. Conclusion is thus made that the regression residuals from the estimated equations followed a normal distribution. Since any linear function of normally distributed variables is considered to be normally distributed, normal distribution of the residuals had the implication that the coefficients of the estimates were also themselves normally distributed (Gujarati, 2008).

The residual plot is shown below:

From the residual plot it can be seen that all the residuals fall within the standard error bands thus confirming that the model is stable and can thus be used for forecasting.

References

Greene, W. (2008). Econometric analysis, 6th ed. . New Jersey: Pearson-Prentice Hall.

Gujarati, D. (2004). Basic econometrics 4th ed. . New York: McGraw Hill Companies.

Normal Probability Plot

Sample Percentile

MedianSchoolYears

Age Residual Plot

Age

Residuals