Econometrics HT 18

Chapter 6 : Measures of fit

By Lund University

We evaluate how well our straight line fit the scatter plot.

Measures of fit

In some cases, our trendline will fit our data well and, in some cases, it will not. In order to derive a measure of fit, we begin by identify an important result: the total variation in the data will be equal to the variation that we can explain (with the trend line) and variation that we cannot explain. From this, we define the measure of fit, R-squared, as the proportion of the total variation that we can explain.

Measure of fit

Residuals and fit in Eviews

Problem: Prove that ESS + RSS = TSS