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# class12-06 - Class 12 Wednesday November 8 Econ 444...

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Class 12, Wednesday November 8 Econ 444, Wednesday November 8, class 12 Robert de Jong 1 1 Department of Economics Ohio State University Wednesday November 8 Robert de Jong Econ 444, Wednesday November 8, class 12

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Class 12, Wednesday November 8 Wednesday November 8 1 Pollkatz graph and article 2 Multicollinearity 3 p -values 4 Omitted variables 5 Data mining 6 Olympic games and medals Robert de Jong Econ 444, Wednesday November 8, class 12
Class 12, Wednesday November 8 Multicollinearity: failure of model assumption 6: “No explanatory variable is a perfect linear combination of any other explanatory variable(s) (no perfect multicollinearity)." Y i = β 0 + β 1 X i 1 + β 2 X 2 i + ǫ i where Y i is expenditure on housing of individual # i X i 1 is annual income in dollars of individual # i X 2 i is annual income in thousands of dollars so, 1000 · X 1 i = X 2 i always ! Perfect multicollinearity : this is not allowed; Eviews gives error message “near singular matrix” Robert de Jong Econ 444, Wednesday November 8, class 12

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Class 12, Wednesday November 8 More problematic in practice: 1000 · X 1 i X 2 i (someone rounded off) Eviews produces output; however we should realize there is a problem here near multicollinearity Other example of multicollinearity: including a dummy F i that equals 1 for all females in sample AND a dummy M i that equals 1 for all males in the sample Then, F i + M i = 1 always Robert de Jong Econ 444, Wednesday November 8, class 12
Class 12, Wednesday November 8 “No explanatory variable is a perfect linear combination of any other explanatory variable(s) (no perfect multicollinearity)."

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class12-06 - Class 12 Wednesday November 8 Econ 444...

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