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# lecture_3_slides - Linear regression allows us to estimate...

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4-1 Linear Regression with One Regressor (SW Chapter 4) Linear regression allows us to estimate, and make inferences about, population slope coefficients. Ultimately our aim is to estimate the causal effect on Y of a unit change in X – but for now, just think of the problem of fitting a straight line to data on two variables, Y and X .

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4-2 The problems of statistical inference for linear regression are, at a general level, the same as for estimation of the mean or of the differences between two means. Statistical, or econometric, inference about the slope entails: Estimation: o How should we draw a line through the data to estimate the (population) slope (answer: ordinary least squares). o What are advantages and disadvantages of OLS? Hypothesis testing: o How to test if the slope is zero? Confidence intervals: o How to construct a confidence interval for the slope?
4-3 Linear Regression: Some Notation and Terminology (SW Section 4.1) The population regression line : Test Score = β 0 + β 1 STR β 1 = slope of population regression line = Test score STR Δ Δ = change in test score for a unit change in STR Why are β 0 and β 1 “population” parameters ? We would like to know the population value of β 1 . We don’t know β 1 , so must estimate it using data.

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4-4 The Population Linear Regression Model – general notation Y i = β 0 + β 1 X i + u i , i = 1,…, n X is the independent variable or regressor Y is the dependent variable β 0 = intercept β 1 = slope u i = the regression error The regression error consists of omitted factors, or possibly measurement error in the measurement of Y . In general, these omitted factors are other factors that influence Y , other than the variable X
4-5 This terminology in a picture : Observations on Y and X ; the population regression line; and the regression error (the “error term”):

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4-6 The Ordinary Least Squares Estimator (SW Section 4.2) How can we estimate β 0 and β 1 from data? Recall that Y was the least squares estimator of μ Y : Y solves, 2 1 min ( ) n m i i Y m = - By analogy, we will focus on the least squares (“ ordinary least squares ” or “ OLS ”) estimator of the unknown parameters β 0 and β 1 , which solves, 0 1 2 , 0 1 1 min [ ( )] n b b i i i Y b b X = - +
4-7 Mechanics of OLS The population regression line: Test Score = β 0 + β 1 STR β 1 = Test score STR Δ Δ = ??

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4-8 The OLS estimator solves: 0 1 2 , 0 1 1 min [ ( )] n b b i i i Y b b X = - + The OLS estimator minimizes the average squared difference between the actual values of Y i and the prediction (“predicted value”) based on the estimated line. This minimization problem can be solved using calculus (App. 4.2). The result is the OLS estimators of β 0 and β 1 .
4-9

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4-10 Application to the California Test Score – Class Size data Estimated slope = 1 ˆ β = – 2.28 Estimated intercept = 0 ˆ β = 698.9 Estimated regression line: · TestScore = 698.9 – 2.28 × STR
4-11 Interpretation of the estimated slope and intercept · TestScore = 698.9 – 2.28 × STR Districts with one more student per teacher on average have test scores that are 2.28 points lower.

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