INTRODUCTION TO ECONOMETRICS II ECO 306 NOUN 137 The other problem is that the predicted probability maybe greater than 1 or less than 0 for extreme values of X. The first problem is dealt with by fitting the model with a technique known as maximum likelihood estimation. The second problem involves elaborating the model as follows. Define a variable Z that is a linear function of the descriptive variables. In the present case, since we have only one descriptive variable, this function is
…[5.13] 5.2.3.2 Goodness of Fit and Statistical Tests Even though numerous measures have been proposed for comparing alternative model specifications, there is still no measure of goodness of fit equivalent to R 2 in maximum likelihood estimation. Denoting the actual outcome in observation
if the event occurs and 0 if it does not, and denoting the predicted probability of the event occurring ̂ the measures include the following i. the number of outcomes correctly predicted, taking the prediction in observation
̂ is greater than 0.5 and 0 if it is less ii. the sum of the squared residuals ∑ (
iv. the pseudo in the logit output, Every of these measures has its shortcomings, and it is recommended to consider more than one and compare their results. Nevertheless, the standard significance tests are similar to those for the standard regression model. The significance of an individual coefficient can be evaluated via its t statistic. However, since the standard error is valid only asymptotically (in large samples, the same goes for the t statistic, and since the t distribution converges to the normal distribution in large samples, the critical values of the latter should be used. The counterpart of the F test of the explanatory power of the model (H 0 : all the slope coefficients are 0, H 1 : at least one is nonzero) is a chi-squared test with the chi-squared statistic in the logit output distributed under H 0 with degrees of freedom equal to the number of explanatory variables.
