Assumptions of OLS 1) The error terms are normally distributed. 2) Any two errors are independent of each other.

3) The error terms all have the same variance. 4) The means of the y-values all happen to lie on a straight line. Consequences of Autocorrelation a) b) c) d) The OLS estimators are biased. Not efficient (Not BLUE) T & F tests are not generally reliable. An unreliable measure of true R2

Consequences of Heteroscedasticity a) The OLS estimators are still unbiased, but they are inefficient. b) The OLS does not provide the estimate with the smallest variance. c) The standard errors are biased. Consequences of Multicollinearity a) b) c) d) Large variance & Standard error Wider CI High R2 but few significant t ratios Wrong sign of regression coefficients