The process of Hausman Test Essay

Hausman Test
Hausman test is run by taking the output from random effect model .If There is a Significant in hausman test.we use panel regression fixed effect model then run diagnostic test. However, If insignificant when Running the hausman test then we use panel regression random fixed effect model than futher run diagnostic test. Since panel-data regression was used, the Hausman test was performed, to decide whether to use the fixed effects (FE) or random effect (RE) model by first determining whether there was a correlation between the unobservable heterogeneity ( mui) of each firm and the explanatory variables of the model.
To determine which of these two models is appropriate, coefficients are estimated by both fixed and random effects. We have used Hausman (1978) test to determine whether fixed or random effect should be used. If the null hypothesis i.e. E (i / xit) = 0 is accepted, then random effect will be an efficient estimator otherwise in case of rejection of null hypothesis, fixed effect estimation will give better or efficient estimation of betas. Hausman test fails to rejects the null hypothesis, therefore decision is taken to use random effect model. We have used E-VIEW 9 to estimate the above models.
should be used Tests for the statistical significance of the difference between the coefficient estimates obtained by FE and by RE, under then null hypothesis that the RE estimates are efficient and consistent, and FE estimates are inefficient.
FIXED
At panel option for Fixed effect model the table cross section and period must be fixed. Then explain the result F-Statistics,T-Statistics for each coefficients and Run Diagnostic Test .In order to show that study use random effect model it require to show Redundant Effects-Likelihood Ratio Test OLS and Hausman test to be significant .Fixed effects are calculated by deducting the "within" mean from a every single variable and also require to estimating Panel Least Square using the transformed data. Within the Fixed effect model, it assumes firm specific intercepts and detain the effects of those variables which are specific to each firm and fixed over time. Random effect model it is assumed that there is a single common intercept and it varies from firm to firm in a random manner (Javid, 2014).
RANDOM
At Panel option for Random effect model the table cross section and period must be random. Then explain the result F-Statistics,T-Statistics for each coefficients and Run Diagnostic Test .In order to show that study use random effect model it require to show Redundant Effects-Likelihood Ratio Test OLS significant and Hausman test to be insignificant.A classical test for the panel data is one of Random effect model versus fixed effect model (Yafee, 2003). For estimating the models, first we need to determine whether there exists a correlation between the independent variables. If the correlation exists then a fixed effect model will give consistent results otherwise random effect model will be an efficient estimators and it is estimated by generalized least square (Teruel and Solano, 2007).