Yesterday during a presentation I gave there were a few questions about the interpretation of p-values.  My opinion is that classical hypothesis testing confuses many people and there a few things that are counterintuitive. After the presentation, I corresponded with one of the participants and ended up creating a Monte Carlo simulation to help illustrate hypothesis testing and p-value interpretation. It seemed like a logical thing to turn into a blog post.

Peter Kennedy’s Guide to Econometrics has a great treatment of Monte Carlos and explains many topics in econometrics through the lens of Monte Carlos. I also had a time series professor who illustrated topics with Monte Carlos and I found that this approach helped solidify these topics in my mind.

Two things follow: a link to my Github with output from a Monte Carlo simulation that I ran in Stata and a write up based on my correspondence with the participant.

Read the rest of this entry »