The exact derivation of these procedures is beyond the scope of this book but we will attempt to give an intuitive account of these three. The idea of most tests is to asses the difference between an unrestricted model and a restricted version of the same model. If the restriction does not affect the fit of the model very much then we would want to accept the restriction as being valid. If on the other hand the model fits much worse then we would reject the model. Of course this means we have to have some firm measure of how much worse the fit can get and still be insignificant.

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Applied econometrics : a modern approach using EViews and Microfit



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