psx140a - University of California Department of Economics...

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University of California D. Steigerwald Department of Economics Economics 140A Problem Set X 1. Suppose that you have data (Y t , X t ) , t = 1,. ..,n that satisfy Y t = β 0 + 1 X t + U t , where U t satisfies all of the standard assumptions. In examining the X t observations you notice that the sample variance of the difference X t -X t-1 seems to be higher than that of X t due to extreme variation from observation to observation, so you decide to estimate 1 from a regression of Y t -Y t-1 on X t -X t-1 . Is this a good idea? Why or why not? 2. In the linear probability model we know that the errors are heteroskedastic. In fact, their variance is given by ) EY ( EY ) U ( E t t t = 1 2 Can we use the residuals to estimate the error variance directly? If not, what alternative measure would you propose? 3. On occasion, municipal governments find that tax receipts fall short of the interest payments on their bonds. When this occurs, the municipalities default on their bonds. In
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This note was uploaded on 12/26/2011 for the course ECON 140a taught by Professor Staff during the Fall '08 term at UCSB.

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psx140a - University of California Department of Economics...

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