Cross Sectional Flashcards
What are two requirements for linear regression
1) Additive errors 2) One multiplicative parameter per term
What are some important requirements for dummy variables?
They cannot depend on Y You cannot include intercept and all dummies. Would give perfect collinearity (Xs are not linearly independent)
Derive the OLS beta estimator
What is the formula for R^2 centered?
RSS/ TSS = 1 - SSE/TSS
What is TSS, RSS and SSE
When to use centered and uncentered R^2?
When model does not contains constant, use uncentered
What are the large-sample asymptotic assumptions of regression?
1) Stationary ergodicity 2) Full rank (E[Xi’Xi]) 3) Martingale difference sequence (error times regressor) 4) Moment existence. Regressors have finite 4th moments and errors have finite variance
What is estimator bias?
Difference between expected value of estimator and true value of parameter
What is estimator consistency?
And estimator is consistent if its probability limit is the true parameter
What is the problem with ommited variables?
If the estimated excludes relevant variables that are correlated with the included variables, the parameter estimates will be biased. Also, parameter variance will not be estimated consistently. It is safe to exclude dummy variables since they are orthogonal to regressors
What happens if you include extraneous (non-relevant variables)
You parameter estimates will still be unbiased and variance will still be consistent. But you will have more variance (potentially too low t-stat)
What are the problems of working with heteroscedastic data?
Parameters will be unbiased, but variance estimator will be inconsistent. One solution is to use White’s robust variance estimator. Using White’s estimator on homoscedastic data will however give worse finite sample properties and increases likelihood of size distortions. Another solution to heteroscedastcity is to use GLS
How can use test for heteroscedasticity?
Use White’s test. Estimate your model. Then regress squared errors on squares and cross products of all regressors (including constants). Null hypothesis: all parameters (except for intercept) are zero. Test statistic n*R^2. It is chi^2 squared distributed with df = number of regressors in auxiliary regression (excluding intercept)
What happens when errors are correlated with regressors?
If measuring regressors with noise. Regressors and errors may be correlated. This gives downwards bias. Endogeneity will also give bias.
What is a type 1 error
Rejecting a true null
What is a type 2 error?
Failure to reject the null when the alternative is true