LinearRegression1

# E y b0 b1x 0 2 e x y b0 b1x 0 these are

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Unformatted text preview: - b1x )ùúû = 0 (These are called moment restrictions) VER. 9/25/2012. © P. KOLM 14 Moment restrictions: E [y - b0 - b1x ] = 0 E éêëx (y - b0 - b1x )ùúû = 0 Sample versions of the moment restrictions: n -1 n å (y i =1 n i ˆ ˆ - b0 - b1x i ) = 0 ˆ ˆ n -1 å x i (yi - b0 - b1x i ) = 0 i =1 The first condition is the same as saying ˆ ˆ y = b0 + b1x or ˆ ˆ b0 = y - b1x ˆ So once we calculate the averages y , x (from the sample!) and the slope b1 (see ˆ below) we obtain the intercept b 0 VER. 9/25/2012. © P. KOLM 15 ˆ How do we calculate the slope b1 ? Recall: n -1 n å x (y i i =1 i ˆ ˆ - b0 - b1x i ) = 0 From this we obtain1 n å x (y i i =1 i ˆ ˆ - (y - b1x ) - b1x i ) = 0 n n i =1 i =1 ˆ å x i (yi - y ) = b1 å x i (x i - x ) n i =1 n i =1 2 ˆ x i - x )(yi - y ) = b1 å (x i - x ) å( n ˆ And therefore, b1 = å (x i =1 i n å (x i =1 VER. 9/25/2012. © P. KOLM - x )(yi - y ) -x) 2 i provided that n å (x i - x ) > 0 2 i =1 16 Remarks ˆ ˆ b0 and b1 are called the ordinary least squares (OLS) estimates of b0 and b1 For any value of x = x i we obtain a fitted value for y, ˆ ˆ ˆ yi = b0 + b1x i Note: The slope is the sample covariance between x and y divided by the sample variance of x , i.e. n ˆ b1 = = å (x i =1 i - x )(yi - y ) n -1 Cov(x , y ) º rxy sx sy Var (x ) ⋅ n -1 n å (x i - x ) 2 i =1 o If x and y are positively correlated ( rxy > 0 ), the slope will be positive o If x and y are negatively correlated ( rxy < 0 ), the slope will be negative Important: We need x to vary in our sample otherwise n å (x i =1 VER. 9/25/2012. © P. KOLM -x) = 0 2 i 17 Alternative Derivation of OLS2 Least squares: Fitting a line through the sample points such that the sum of squared residuals is as small as possible, hence the term “ordinary least squares” ˆ The residual, u , is an estimate of the error term, u , and is the difference between the fitted line (sample regression function) and the sample point. Solving3 n n min å u = min å (yi - b0 - b1x i ) b0 , b1 i =1 2 i b0 , b1 2 i =1 ˆ ˆ using calculus gives us b0 and b1 as before VER. 9/...
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## This document was uploaded on 02/17/2014 for the course COURANT G63.2751.0 at NYU.

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