Basic Econometrics

PGDMB15(2014-16)
Lecture 5 Notes

Consider the following simple linear regression equation: Yi = 1 + 2 Xi + ui

Gauss-Markov Assumptions are the following:
1. The regression equation is linear in parameters ( 0 s).
2. X is non-random/non-stochastic (fixed in repeated samples)
3. Error term has zero mean: E(ui ) = 0
4. Error term is homoscedastic: E(u2i ) = 2
5. Zero autocorrelation between errors: Cov(ui , uj ) = E(ui uj ) = 0 where i 6= j
6. Zero covariance between u and X: Cov(u, X) = 0
7. No. of observations is greater than no of parameters to be estimated: n > k where k is
the number of regressors including the intercept
8. Not all values of X are the same: V ar(X) > 0
Gauss-Markov theorem: Given the above assumptions OLS estimators are Best Linear Unbiased Estimators(BLUE).

R2 is a measure of goodness of fit (Also known as coefficient of determination)

Remember the following:
R2 lies between 0 and 1.
R2 = r2 Y,Yb
R2 is generally high in time-series data.
R2 is generally low in cross-sectional data.
R2 is most meaningful in OLS estimation with an intercept.(can lie outside [0, 1] interval
if estimated without an intercept)
R2 from two different regression equations with different dependent variables cannot be
compared.
Excel output

(Yi Y )2 [Total sum of sq with df = n 1]

P
ESS = (Ybi Y )2 [Regression sum of sq with df = k 1] M S =
T SS =

ESS
k1

 RSS =
R2 =

ubi 2 =

P
(Yi Ybi )2 [Residual sum of sq with df = n k] M S =

ESS
T SS

Multiple R =

R2

R2 = 1 (1 R2 )

n1
nk

Standard error (SE)=

b

RSS
nk

=
b2