The Major Anomalies Flashcards
Non-Stationarity
Severity Ranking: (12/18 Total) (1/7 Major)
Description: One or more variables have unit roots.
Implication: OLS parameter estimates are biased and inconsistent. Standard errors of OLS parameter
estimates are biased toward zero.
Identification: Augmented Dickey-Fuller Test. Phillips-Perron Test. Informal identification: R^2 exceeds the
Durbin-Watson statistic; AR(1) coefficient close to or exceeds 1.
Correction: First difference, second difference, percentage change, log, cointegration
Invalid Restrictions
Severity Ranking: (13/18 Total) (2/7 Major)
Description: Restrictions placed on model parameters are inconsistent with the true model.
Implication: Parameter estimates are biased and inconsistent.
Identification: F-Test.
Correction: Alter the restrictions.
Binary Dependent Variable
Severity Ranking: (14/18 Total) (3/7 Major)
Description: The dependent variable takes on only two values.
Implication: OLS parameter estimates are biased and inconsistent. Standard errors of the OLS estimates
are biased and inconsistent.
Identification: Examine the dependent variable.
Correction: Logit, Probit, Tobit.
Multinomial Nominal Dependent Variable
Severity Ranking: (15/18 Total) (4/7 Major)
Description: The dependent variable takes on discrete values. The ordering of the values contains no
information.
Implication: OLS parameter estimates are biased and inconsistent. Standard errors of the OLS estimates
are biased and inconsistent.
Identification: Examine the dependent variable.
Correction: Multinomial logit, multinomial probit, or multinomial tobit.
Multinomial Ordered Dependent Variable
Severity Ranking: (16/18 Total) (5/7 Major)
Description: The dependent variable takes on a small number of discrete values. The ordering of the
values contains information, but the distances between values contain no information.
Implication: OLS parameter estimates are biased and
inconsistent. Standard errors of the OLS estimates
are biased and inconsistent.
Identification: Examine the dependent variable.
Correction: Ordered logit, ordered probit, or ordered tobit
Censored Dependent Variable
Severity Ranking: (17/18 Total) (6/7 Major)
Description: The dependent variable is correctly reported when it is within a given range, but incorrectly
reported as the end-point of the range when outside the range.
Implication: OLS parameter estimates are biased and inconsistent.
Identification: Examine the conditions under which the dependent variable is measured.
Correction: ML for censored data
Truncated Dependent Variable
Severity Ranking: (18/18 Total) (17/7 Major)
Description: The dependent variable and regressors are not reported when the dependent variable is
outside a given range.
Implication: OLS parameter estimates are biased and inconsistent. Standard errors of the OLS estimates
are biased and inconsistent.
Identification: Examine the conditions under which the dependent variable is measured.
Correction: ML for truncated data.
