ECON206_1011_01_Handout_09 - ECON 206 METU Department of...

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ECON 206 December 20, 2010 METU- Department of Economics Instructor: H. Ozan ERUYGUR e-mail: [email protected] 1 LECTURE 09 SIMPLE REGRESSION MODEL - I Outline of today’s lecture: I. Simple Linear Regression Model ....................................................................................... 1 II. Linearity Issue ................................................................................................................... 2 III. Stochastic Nature of Linear Regression Model ............................................................... 3 IV. Assumptions of Classical Linear Model .......................................................................... 4 V. Gauss Markov Theorem .................................................................................................... 8 VI. Normality Assumption ..................................................................................................... 8 I. Simple Linear Regression Model In econometrics we deal exclusively with stochastic relations. o Stochastic is a term for random or uncertain . o It is the opposite of deterministic . The simplest form of stochastic relation between two variables X and Y is called a simple linear regression model. o 0 1 t t t Y X u β β = + + t =1,..., n where Y is dependent variable X is independent (explanatory) variable 1 u is the stochastic disturbance term, or error term. 0 β and 1 β are the regression parameters which are unknown . Subscript t refers to the t th observation. 1 The terms regressor, regressand and covariate are also used.
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