3 - CRE Model / RE testing

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Last updated 7:01 AM on 6/13/26
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7 Terms

1
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Why are mean variables included in a CRE model?

To allow the individual effect to be correlated with the explanatory variables.

2
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Why do time-invariant variables not appear as means in CRE?

For a time-invariant variable X-i = Xi. Including both creates perfect multicollinearity.

3
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What are the hypotheses for the CRE test?

H0: B(j) = 0 ; H1: at least one B(j) not 0

4
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Distribution in CRE test?

Chissq_q, where q is the number of restrictions

5
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CRE test decision rule?

At the 5% significance level, reject H0 if Chissq > Chissq(0.95,q)

6
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CRE test conclusion if χ2>χc2​

We reject H0. There is sufficient evidence that the mean variables are jointly significant. Therefore, the Random Effects estimator is not appropriate, and the Correlated Random Effects model is preferred.

7
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CRE test conclusion if χ2<χc

We fail to reject H0. There is insufficient evidence that the mean variables are jointly significant and the sample evidence is consistent with Random Effects estimator being appropriate