Scribd Logo
Upload

Welcome to Scribd!

  • 18 views

    Econometric S

    Uploaded by

    D mathew
    The document discusses the simple linear regression model. It defines key terms like the dependent variable, explanatory variables, population regression function, and sample regression function. It also outlines the ordinary least squares method used to estimate unknown parameters in the linear regression model by minimizing the error term. Finally, it lists the 10 assumptions of the classical linear regression model, including that the regression is linear, explanatory variables are fixed, the disturbance term has zero mean and equal variance, and there is no autocorrelation or perfect multicollinearity.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Econometric S

    Uploaded by

    D mathew
    18 views4 pages
    The document discusses the simple linear regression model. It defines key terms like the dependent variable, explanatory variables, population regression function, and sample regression function. It also outlines the ordinary least squares method used to estimate unknown parameters in the linear regression model by minimizing the error term. Finally, it lists the 10 assumptions of the classical linear regression model, including that the regression is linear, explanatory variables are fixed, the disturbance term has zero mean and equal variance, and there is no autocorrelation or perfect multicollinearity.

    Original Title

    Econometric s

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document discusses the simple linear regression model. It defines key terms like the dependent variable, explanatory variables, population regression function, and sample regression function. It also outlines the ordinary least squares method used to estimate unknown parameters in the linear regression model by minimizing the error term. Finally, it lists the 10 assumptions of the classical linear regression model, including that the regression is linear, explanatory variables are fixed, the disturbance term has zero mean and equal variance, and there is no autocorrelation or perfect multicollinearity.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    18 views4 pages

    Econometric S

    Uploaded by

    D mathew
    The document discusses the simple linear regression model. It defines key terms like the dependent variable, explanatory variables, population regression function, and sample regression function. It also outlines the ordinary least squares method used to estimate unknown parameters in the linear regression model by minimizing the error term. Finally, it lists the 10 assumptions of the classical linear regression model, including that the regression is linear, explanatory variables are fixed, the disturbance term has zero mean and equal variance, and there is no autocorrelation or perfect multicollinearity.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    You are on page 1of 4

    THE SIMPLE LINEAR REGRESSION MODEL

    As we mentioned in the methodology, the process of econometric


    analysis starts with an econometric model. An econometric model can
    be constructed using regression equation. Therefore regression is
    considered as a main tool of econometrics.

    Regression analysis is concerned with the study of the dependence of


    one variable, the dependent variable, on one or more other variables,
    the explanatory variables, with a view to estimating and/or predicting
    the (population) mean or average value of the former in terms of the
    known or fixed (in repeated sampling) values of the latter.

    The term dependent variable can be denoted using other terminologies


    like Explained variable, Regressand, Endogenous variable, and
    Controlled variable. Likewise the term explanatory variables also have
    other terminologies such as Independent variable, Regressor,
    Exogenous variable, and Control variable.

    E(Y | Xi) = β1 + β2Xi

    Where β1 and β2 are unknown but fixed parameters known as the


    regression coefficients. Equation itself is known as the linear
    population regression function (PRF).
    THE SAMPLE REGRESSION FUNCTION (SRF):
    Yi = ˆ β1 + ˆβ2Xi + ˆui

    The PRF is an idealized concept, since in practice one rarely has access
    to the entire population of interest. Usually, one has a sample of
    observations from the population. Therefore, error term is an inevitable
    element in models based on samples. Usually, one has to use the
    stochastic sample regression function (SRF) to estimate the PRF.

    OLS METHOD

    The estimation of econometric model is very crucial in econometric


    analysis. The method of ordinary least squares is attributed to Carl
    Friedrich Gauss, a German mathematician. Under certain assumptions,
    the method of least squares has some very attractive statistical
    properties that have made it one of the most powerful and popular
    methods for estimating the unknown parameters in a linear regression
    model.

    This method work based on the criterion of minimizing error term.


    Under this method, the value of parameter is selected at which the
    summation of error square is minimum.

    ui2=(Yi-Yi) 2 should be minimum


    ASSUMPTIONS OF CLASSICAL LINEAR REGRESSION
    MODEL

    1: The regression model is linear in the parameters. Keep in mind


    that the regressand Y and the regressor X themselves may be nonlinear.

    2: X values are fixed in repeated sampling. Values taken by the


    regressor X are considered fixed in repeated samples. More technically,
    X is assumed to be nonstochastic.

    3: Zero mean value of disturbance ui. Given the value of X, the mean,
    or expected, value of the random disturbance term ui is zero.
    Technically, the conditional mean value of ui is zero. Symbolically, we
    have
    E(ui |Xi) = 0

    4: Homoscedasticity or equal variance of ui. Given the value of X,


    the variance of ui is the same for all observations. That is, the
    conditional variances of ui are identical. Symbolically, we have
    Var (ui) = 2

    5: No autocorrelation between the disturbances. Given any two X


    values, Xi and Xj (i _= j), the correlation between any two ui and uj (i
    _= j) is zero. Symbolically,
    Cov (ui, uj) = 0
    6: Zero covariance between ui and Xi, or E(ui, Xi) = 0.

    7: The number of observations n must be greater than the number


    of parameters to be estimated.

    8: Variability in X values. The X values in a given sample must not


    all be the same. If all the X values are identical, then Xi = .X and the
    denominator of that equation will be zero, making it impossible to
    estimate β2 and therefore β1.

    9: The regression model is correctly specified. Alternatively, there is


    no specification bias or error in the model used in empirical analysis.

    10: There is no perfect multicollinearity. That is, there are no perfect


    linear relationships among the explanatory variables.

    You might also like