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Econ 4818 - Introduction to Econometrics - Formula Sheet 3

Simple Regression Model

y = 0 + 1 x1 + u (true model, aka population model)
c c
yb = 0 + 1 x1 (estimated OLS model, aka OLS regression line)
P
n
(xi x)(yi y)
c= i=1
; c=y cx (OLS estimators)
1 P
n 0 1
(xi x)2
i=1
yb (tted or predicted values)
y (actual values)
ub = y yb (residulas)
V ar (u) = 2 (variance of the error term u)
2 SSR
b = n 2 (estimator of 2 )
sd (u) = (standard deviation of the error term u)
se (u) = b (estimator of (aka standard error of the regression))
2n 1
P
n
xi 2
2
V ar b 0 = P
n
i=1
; V ar b 1 = P
n (sampling variances of the OLS
2
(xi x) (xi x)2
i=1 i=1
estimators)

P
n P
n P
n
SST = (yi y)2 ; SSE = (ybi y)2 ; SSR = (ubi )2
i=1 i=1 i=1
SSE SSR
R2 = SST = 1 SST ,where R2 2 [0; 1]

Omitted Variable Bias:

y = 0 + 1 x1 + 2 x2 + u (true model)
yb = c0 + c1 x1 + c2 x2 (estimated full model)
ye = f0 + f1 x1 (estimated model with omitted variable x2 )
Bias f = 1
e1
2

where e1 comes from the regression x

e2 = e0 + e1 x1 ,
and for practical purposes e1 = Corr (x1 ; x2 )

Multiple Regression Model

y = 0 + 1 x1 + 2 x2 + ::::: + k xk + u (population model)
c c c c
yb = 0 + 1 x1 + 2 x2 + ::::: + k xk + u (OLS regression line)
2
c
V ar j = SST 1 R2 (sampling variances of the OLS estimators)
j( j)
P
n
where SSTj = (xi x)2
i=1
and Rj2 is the R2 from the regression of xj on all other independent variables in the
model r
sd cj = SST
2

j (1 Rj2 )

1
r
b2
se cj = SSTj (1 Rj2 )

Simple Regression Assumptions: Multiple Regression Assumptions

1. Linear in parameters 1. Linear in parameters
2. Random sampling 2. Random sampling
3. Sample vaiation in the independent variable 3. No perfect collinearity
4. Zero conditional mean 4. Zero conditional mean
5: Homoskedasticity 5: Homoskedasticity
6. Normality of the error term 6. Normality of the error term

Unbiasedness Assumptions: 1-4

Gaus-Markov Assumptions: 1-5
CLM Assumptions: 1-6

c a
j
t statistic = ~ tn k 1
se cj

95% Condence Interval for j: : cj c se cj where c is the 97:5th percentile in

a tn k 1 distribution

2 Rr2 )=q
(SSRr SSRur )=q (Rur
F statistic = SSRur =(n k 1) 2 )=(n k 1)
(1 Rur
~ Fq;n k 1

V ar ac1 bc2 = a2 V ar c1 + b2 V ar c2 2abCov c1 ; c2

x x
Standardized variable / z-score: sd(x)

c x
\
log (y) = c0 + c1 x ) % yb = 100 e 1 1

SSR=(n k 1) (1 R2 )(n 1)
R2 = 1 SST =(n 1) 1 (n k 1)

1. Linear in parameters Unbiasedness Assumptions: 1-4

2. No perfect collinearity Gaus-Markov Assumptions: 1-5
3. Zero conditional mean E (ut jX ) = 0 CLM Assumptions: 1-6
4. Homoskedasticity
5. No serial correlation
6. Normality of ut

R2 2 =k
b
Breusch-Pagan and White F-statistic: F = u
1 R2 2 =(n k 1)
b
u