Hausman Specification Test Essay
4.1 REGRESSION ANALYSIS 4.1.1 Hausman Specification Test A Hausman Specification Test is performed to decide whether to use FE or RE estimation. Since they tend to give consistent results the reasonable thing to do with panel data regression is the FE. RE usually give better p-values because they are the efficient estimator. Hence, if it is statistically justifiable to do so there should be the use of RE model. The Hausman Specification Test will help identify the most effective model to use. A FE model must be estimated first and after saving the coefficient a RE model must be estimated to be able to run a Hausman Specification Test. This Test will test the null hypothesis that has been estimated by the efficient RE estimator are similar to …show more content…
It illustrates that whenever the stock market development increases by 1%, ROE will fall by 0.23%. A highly developed non-banking financial sector may apply competitive pressure on the banking sector since it is discussed that there is a positive association between market capitalisation and competition. This coefficient is not significant with a p-value greater than 0.05 and t-ratio higher than 1.96. Financial market does not have so much influence on profitability of banks. 4.1.1.6 Real growth rate For economic growth the coefficient is negative which explain that a fall of 1% in economic growth would result in a reduction of 0.735%. It is consistent with the result of Demirguc-Kunt and Huizinga (1999) who found and insignificant relation between growth rate over bank profits. The negative impact maybe the result of the financial crisis 2008 which cause the economic growth to decline. 4.1.1.7 Inflation rate Conversely, it has been observed that inflation rate has a positive but insignificant coefficient which entails that it did not have a great impact on banks profit. A 1% increase in inflation would result in a 1.25% increase in bank profits. Therefore, there has been a positive relationship between profits and inflation related with their finding of Flamini et al. (2009)
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