Introductory Econometrics Formula Sheet for the Final Exam

You are allowed to use the following formula sheet for the final exam.
1. Multiple linear regression assumptions:
MLR.1: Y = 0 + 1 X1 + . . . + k Xk + U (model)
MLR.2: The observed data {(Yi , X1i , . . . , Xki ), i = 1, . . . , n} is a random
sample from the population
MLR.3: In the sample, none of the explanatory variables has constant values
and there is no perfect linear relationships among the explanatory variables.
MLR.4: (Zero conditional mean) E(U |X1 , . . . , Xk ) = 0
MLR.5: (Homoskedasticity) V ar(U |X1 , . . . , Xk ) = V ar(U ) = 2
MLR.6: (Normality) U | X1 , . . . , Xk N (0, 2 )
2. The OLS estimator and its algebraic properties
The OLS estimator solves
n
X
min
(Yi 0 1 X1i 2 X2i . . . k Xki )2

0 ,...,k

i=1

Solution: In the general case no explicit was solution given. If k = 1, i.e.

there is only one explanatory variable, then
Pn
1 )(Yi Y )
(X X

1.
Pn 1i
and 0 = Y 1 X
1 = i=1
2

(X

X
)
1i
1
i=1
Predicted value for individual i in the sample: Yi = 0 + 1 X1i + . . . k Xki .
Residual for individual i in the sample: Ui = Yi Yi .
Pn

i=1 Ui = 0
Pn

i=1 Ui Xji , j = 1, . . . , k
1, . . . , X
k , Y )
estimated regression line goes through (X
3. Properties of the log function:
100 log(x) 100
1

x
= %x
x

Predicting Y when the dependent variable is log(Y ):

2

Yadjusted = e /2 e0 +1 X1 +...k Xk

4. SST, SSE, SSR, R2

P
SST = ni=1 (Yi Y )2
P
SSE = ni=1 (Yi Y )2
P
SSR = ni=1 Ui2
SST = SSE + SSR
R2 = SSE/SST = 1 SSR/SST
5. Variance of the OLS estimator, estimated standard error, etc.
For j = 1, . . . , k:
V ar(j ) =

2
,
SSTXj (1 Rj2 )

P
j )2 and R2 is the R-squared from the regression
where SSTXj = ni=1 (Xji X
j
of Xj on all the other X variables. The estimated standard error of the j ,
j = 1, . . . , k, is given by
s

2
\
se(
j ) =
,
SSTXj (1 Rj2 )
where
2 =

SSR
.
nk1

6. Simple omitted variables formula:

True model: Y = 0 + 1 X1 + 2 X2 + U
Estimated model: Y = 0 + 1 X1 + V

E(1 ) = 1 + 2

cov(X1 , X2 )
var(X1 )

7. Hypothesis testing
a. t-statistic for testing H0 : j = a
j a
t(n k 1) if H0 is true
se(
j )
b. The F-statistic for testing hypotheses involving more than one regression coefficient (ur = unrestricted, r = restricted, q = # of restrictions in H0 , k = # of slope coefficients in the unrestricted regression)
(SSRr SSRur )/q
F (q, n k 1) if H0 is true
SSRur /(n k 1)
8. Heteroskedasticity
Breusch-Pagan test for heteroskedasticity: Regress squared residuals on all
explanatory variables and constant; test for joint significance of the explanatory variables.
(F)GLS estimator: Let h(X1 , . . . , Xk ) = V ar(U |X1 , . . . , Xk ). Divide the
original model by the square root of h and do OLS. If h is unknown, one
needs to model and estimate it as well.
9. Linear probabiliy model
V ar(U |X1 , . . . , Xk ) = (0 + 1 X1 + . . . k Xk )(1 (0 + 1 X1 + . . . k Xk )).