ECON 346 Final Review

# ECON 346 Final Review - ECON 346 Final Review Jin Man Lee...

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Click to edit Master subtitle style 5/12/11 ECON346 ECON 346 Final Review Jin Man Lee

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5/12/11 ECON346 i X N μ = 2 2 ( ) i X N σ - = 2 2 ( ) 1 i X X s n - = - i X X n = 0 1 i i i Y X β ε = + + i 0 1 i i ˆˆ Y = + X e + 2 2 i N σ= 2 2 i N = 0 1 1 2 2 ... i i i k ki i Y X X X = + + + + + 0 1 1 2 2 ˆˆˆˆ ... i i i k ki i Y X X X e = + + + + + 2 2 1 i e s n k = - - 2 2 1 i e s n k = - -
5/12/11 ECON346 OLS Classical Assumptions The regression model is linear in the coefficients, is correctly specified, and has additive error term. The error term has a zero population mean: E( & i) = 0 All explanatory variables are uncorrelated with the error term: E(Xi & i) = 0

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5/12/11 ECON346 0 1 1 2 2 2 2 2 ( ) 0 ( ) 0 ( ) 0, where ( ) ( ) (0, ) i i i i i i i i j i i i Y X X E E X E i j Var E N β ε ε ε σ = + + + = = = = = : Classical Assumptions
5/12/11 ECON346 0 1 1 2 2 2 2 2 ( ) 0 ( ) 0 ( ) 0, where ( ) ( ) (0, ) i i i i i i i i j i i i Y X X E E X E i j Var E N β ε ε ε σ = + + + = = = = = : Classical Assumptions What if Xi is not a number but variables like color, sex, color of skin, seasons like weekly, monthly, or quarterly? Dummy variables 1) Intercept Dummy 1) Slope Dummy 1) Seasonal Dummy Xi = SEXi

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5/12/11 ECON346 Wrong Functional Forms Wrong functional form bad predictions from out of sample 2 2 2 ( ) 0 ( ) 0 ( ) 0, where ( ) ( ) (0, ) i i i i j i i i E E X E i j Var E N ε ε ε σ = = = = = : 2 0 1 1 2 2 i i i i Y X X β = + + + Sampl e 0 1 1 2 2 ˆ ˆ ˆ i i i i Y X X e = + + +
5/12/11 ECON346 Omitted Variable Bias 1, 2 1

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## This note was uploaded on 05/12/2011 for the course FIN 300 taught by Professor Wang during the Spring '11 term at UChicago.

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ECON 346 Final Review - ECON 346 Final Review Jin Man Lee...

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