The Minor Anomalies Flashcards
Multicollinearity
Severity Ranking: (1/18 Total) (1/4 Minor)
Description: Two or more regressors are correlated.
Implication: OLS parameter estimates are inefficient.
Identification: Variance inflation factor.
Correction: Drop one or more of the highly correlated regressors.
Extraneous Regressor
Severity Ranking: (2/18 Total) (2/4 Minor)
Description: A regressor that does not belong in the regression has been included.
Implication: OLS parameter estimates are inefficient.
Identification: Improved R(bar)^2 when regressor is omitted.
Correction: Drop the regressor from the model
Serial Correlation
Severity Ranking: (3/18 Total) (3/4 Minor)
Description: Error terms are correlated across time.
Implication: OLS parameter estimates are unbiased.
Standard errors of the OLS parameter estimates are biased.
Identification: Portmanteau Q-statistics for the autocorrelation and partial autocorrelation correlograms.
Durbin-Watson statistic will identify AR(1) processes. Apparent serial correlation can be
caused by omitted variable / misspecification anomaly.
Correction: GLS, GMM, or OLS with the Cochrane-Orcutt correction.
Note: If the errors are serial correlated, the regressors are serially correlated, and the correlations
are of the same sign, then standard errors of the parameter estimates will be biased toward
zero.
Spatial Correlation
Severity Ranking: (4/18 Total) (4/4 Minor)
Description: Error terms are correlated across cross-sections.
Implication: OLS parameter estimates are unbiased.
Standard errors of the OLS parameter estimates are biased.
Identification: Moran’s I statistic.
Correction: GLS, GMM
