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Wk6 Relaxing Classical Assumptions

# Wk6 Relaxing Classical Assumptions - I nt r oduct i on t o...

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I nt r oduct i on t o Economet r i cs Spr i ng 2010 Wk6. Mul t i col l i neai t y, Het er oskedast i ci t y and Aut ocor r el at i on

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2 Mul t i col l i near i t y ( MC) I f mul t i col l i near i t y i s per f ect , t he r egr essi on coef f i ci ent s of t he X var i abl es ar e i ndet er m i nat e and t hei r st andar d er r or s ar e i nf i ni t e. I f mul t i col l i near i t y i s l ess t han per f ect , t he r egr essi on coef f i ci ent s, al t hough det er m i nat e, possess l ar ge st andar d er r or s ( i n r el at i on t o t he coef f i ci ent s t hemsel ves) , whi ch means t he coef f i ci ent s cannot be est i mat ed wi t h gr eat pr eci si on or accur acy.
3 Per f ect MC i n a t hr ee- var i abl e r egr essi on can f ound by: Assum i ng per f ect MC, say, X 3i = X λ 2i , wher e i s a nonzer o const ant ( e. g. , 2, λ 4, 1. 8, et c. ) , t hen by subst i t ut i on i t i s easy t o see t hat

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4 Det ect i ng and “ sol vi ng” MC Si mpl e ways t o det ect 1. Hi gh R 2 but f ew si gni f i cant t - r at i os. 2. Hi gh pai r - wi se cor r el at i ons among r egr essor s. Si mpl e sol ut i ons 1. Dr oppi ng a var i abl e( s) and speci f i cat i on bi as. 2. Tr ansf or mat i on of var i abl es.
5 Het er oskedast i ci t y What does Het er oskedast i ci t y mean?

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Wk6 Relaxing Classical Assumptions - I nt r oduct i on t o...

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