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Back to Basics: Is Statistical Significance all that Matters?

Author

Listed:
  • Nektarios A. Michail

    (Central Bank of Cyprus)

  • Constantinos I. Massouras

Abstract

We examine whether statistical significance can convey all the information necessary for the econometrician to judge the performance of his models. We find that in some cases, the t-statistic and the R-squared can be biased due to high correlation between the variables and variables can appear significant even though their correlation with the dependent variable is very low. The solution we propose is a back-to-basics approach: examine correlations between variables and variable variances in order for a correct interpretation of the regression outcome.

Suggested Citation

  • Nektarios A. Michail & Constantinos I. Massouras, 2014. "Back to Basics: Is Statistical Significance all that Matters?," Working Papers 2014-3, Central Bank of Cyprus.
    • Handle: RePEc:cyb:wpaper:2014-3
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    File URL: https://www.centralbank.cy/images/media/pdf/WorkingPaper_2014-3.pdf
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    References listed on IDEAS

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    3. Thomas Mayer, 2012. "Ziliak and McCloskey's Criticisms of Significance Tests: An Assessment," Econ Journal Watch, Econ Journal Watch, vol. 9(3), pages 256-297, September.
    4. Wooldridge, Jeffrey M., 2004. "Statistical significance is okay, too: comment on "Size Matters"," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 33(5), pages 577-579, November.
    5. Zellner, Arnold, 2004. "To test or not to test and if so, how?: Comments on "size matters"," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 33(5), pages 581-586, November.
    6. McCloskey, Donald N, 1985. "The Loss Function Has Been Mislaid: The Rhetoric of Significance Tests," American Economic Review, American Economic Association, vol. 75(2), pages 201-205, May.
    7. Leamer, Edward E., 2004. "Are the roads red? Comments on "Size Matters"," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 33(5), pages 555-557, November.
    8. Thomas Mayer, 2012. "Ziliak and McClosky?s Criticisms of Significance Tests: A Damage Assessment," Working Papers 61, University of California, Davis, Department of Economics.
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    10. repec:bla:econom:v:47:y:1980:i:188:p:387-406 is not listed on IDEAS
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    13. Thomas Mayer, 2012. "Ziliak and McClosky?s Criticisms of Significance Tests: A Damage Assessment," Working Papers 126, University of California, Davis, Department of Economics.
    14. Stephen T. Ziliak & Deirdre N. McCloskey, 2013. "We Agree That Statistical Significance Proves Essentially Nothing: A Rejoinder to Thomas Mayer," Econ Journal Watch, Econ Journal Watch, vol. 10(1), pages 97-107, January.
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    Cited by:

    1. Nektarios A. Michail & George Thucydides, 2019. "The impact of foreign demand on Cyprus house prices," Cyprus Economic Policy Review, University of Cyprus, Economics Research Centre, vol. 13(2), pages 48-71, December.

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    More about this item

    Keywords

    correlation; statistical significance; hypothesis testing; t test; F test;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models

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