Econometric Key Terms Flashcards
1
Q
What is multicollinearity?
A
A linear relationship between independent variables.
2
Q
What is heteroskedasticity?
A
A non-constant variance of the error terms.
3
Q
What is autocorrelation?
A
The violation of the assumption of a zero correlation between error terms of the regression function.
4
Q
What are the consequences of autocorrelation?
A
Inefficiency of the OLS estimators; affecting the validity of our statistical tests.
5
Q
Why is multicollinearity a problem?
A
The higher the level of correlation, the more imprecise the estimation will be of the relevant coefficients as the variance increases.
6
Q
What are the problems associated with heteroskedasticity?
A
The OLS estimators no longer have the minimum variance thus they are inefficient.
