Solved – Confidence interval for variance in simple regression model

confidence intervallinearregressionvariance

I am attempting to create a confidence interval for $\sigma^2$ in simple regression model $$ Y_i = \beta_0 + \beta_1 x_i + \epsilon_i , \ \ \epsilon_i \sim \text{ Normal(0, $\sigma^2$)} $$
We know that $$\frac{(n-2)S^2}{\sigma^2}$$
Has chi-squared distribution with $n-2$ degrees of freedom, which allows for us to create such confidence intervals. However, I am unsure what to do in the case when $S^2$, given by
$$\frac{1}{n-2}\sum_{i=1}^n(Y_i – \hat{\beta}_0 – \hat{\beta}_1x_i)^2 $$
Is actually exactly $0$ in the given sample data. In other words, the data presented perfectly fits a straight line. Any advice for how to proceed is much appreciated.

Best Answer

If you consider the following questions they may help you towards an answer:

  1. How can the distribution formula be rearranged to give the distribution of $S^2$ in terms of $\sigma^2$?

  2. What are the mean and variance of the distribution of $S^2$?

  3. Assuming $\sigma^2$ is unknown, as a preliminary to 4 below pick a value for it and find the implied upper and lower 5% (say) confidence limits. Is zero within these limits?

  4. Are there values of $\sigma^2$ that would result in zero being within the confidence limits? If yes, what range of values? If no, what follows?

  5. Finally (and the relevance of this will depend on the level of your course), how is all the above affected if the data is discrete? Very likely, however, the data is intended to be continuous and for convenience the given values are "discrete-looking".

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