ECN 388 Flashcards
What is MLR 1?
We believe the relationship to be linear in nature.
What is MLR 2?
We have a random sample of size n.
What is MLR 3?
The sample outcomes on all the x values are not the same.
What is MLR 4?
The error term, u, has an expected value of zero.
What is MLR 5?
The error term, u, has the same variance given any value of the explanatory variables.
Multicollinearity
When there is a strong correlation between x variables.
Three ways to detect multicollinearity:
- ) calculate correl coefficient and compare to R-squared.
- ) if p-values are greater than R-squared
- ) variance inflation factor
Variance Inflation Factor
VIF = 1/(1-r^2)
VIF > 10
Heteroskedasticity
Not a constant variance in the error term, u.
Violates MLR 5.
Four ways to detect Heteroskedasticity?
- ) Graphical (the error term against the predicted y)
- ) Goldfeld-Quant Test
- ) Park Test: multiplicative Heteroskedasticity
- ) Breusch-Pagan Test
Four ways to correct multicollinearity:
- ) add data
- ) fundamentally change the model
- ) drop a variable that contributes to multicollinearity
- ) do nothing and proceed with caution
Three ways to correct Heteroskedasticity:
- ) weighted least squares
- ) weighted least squares, different weight
- ) STATA fix: “robust”
What is Functional Form Misspecification?
Missing important variables that should be included.
How do we correct Functional Form Misspecification?
Add the needed variables
What are Proxy Variables?
When we know we need a certain variable in the regression but we can’t get it. Use a different variable as a proxy.