OLS Assumptons

Question 1

Under what assumptions is the OLS estimator considered BLUE?

Answer 1

Guess-Markov Theorem assumptions:
1. Linearity
2. Exogeneity - zero unconditional mean of error terms
3. Homoscedasticity
4. No multicollinearity
5. No serial correlation

Question 2

Linearity

Answer 2

The stochastic process must follow a linear model

Question 3

Exogeneity

Answer 3

The error terms must have a zero unconditional mean

Question 4

Homoscedasticity

Answer 4

The error terms must have a constant variance conditional to X

Question 5

No Multicollinearity

Answer 5

All independent variables must not be linear combinations of themselves

Question 6

No Serial Correlation

Answer 6

The error terms in two different time periods must be uncorrelated.

Question 7

Effects of Heteroscedasticity

Answer 7

Continued unbiasedness
Loss of BLUE status due to no longer having smallest variance of L+U estimators
Standard Errors become unreliable
Hypothesis testing becomes unreliable due to standard errors, must use robust standard errors