Professional Documents
Culture Documents
The Method of Ordinary Least Square
The Method of Ordinary Least Square
Y i=β 1 + β 2 X i+ μ i … … … ( 1 )
Y i= β^ 1 + ^β 2 X i+ μ^ i
Y i=Y^ i + μ^ i
^μi=Y i−Y^ i
¿ Y i− β^ 1− β^ 2 X i………………………….(2)
∑ μ^ 2i =∑ (Y i− ^β 1− ^β 2 X i )2……………………………….(3)
Now differentiating (3) partially with respect to ^β 1 and ^β 2 we obtain
δ
^ (∑ μ^ 2i )=−2 ∑ (Y i− ^β 1− ^β 2 X i )……………………………(4)
δ β1
δ
^ (∑ μ^ i2)=−2 ∑ (Y i− ^β 1− ^β 2 X i) X i………………………..(5)
δ β2
−2 ∑ (Y i − ^β 1− ^β 2 X i )=0
⟹ ∑ (Y i − ^β 1− ^β 2 X i )=0
⇒ ∑ Y i −∑ β 1−¿ ∑ ^β 2 X i ¿=0
⇒ ∑ Y i −n ^β1 − ^β 2 ∑ X i =0
⇒ β^ 1=Y − ^β 2 X ………………………………..(6)
−2 ∑ (Y i − ^β 1− ^β 2 X i ) X i=0
⟹ ∑ (Y i − ^β 1− ^β 2 X i ) X i=0
⟹ ∑ Y i X i−∑ β^ 1 X i−∑ β^ 2 X i =0
2
⟹ ∑ Y i X i− ^β 1 ∑ X i− ^β 2 ∑ X i =0
2
⟹ ∑ Y i X i−(Y − ^β 2 X) ∑ X i− ^β 2 ∑ X i =0
2
⟹ ∑ Y i X i−Y ∑ X i + β^ 2 X ∑ X i− β^ 2 ∑ X i =0
2
⟹ ∑ Y i X i−
∑ X i ∑ Y i − ^β ¿
2
n
∑ X ∑Y
∑ Y i X i − ni i
⟹ ^β 2=
∑ X 2i −¿ ¿ ¿ ¿
Numerical properties of the estimators:
1. The OLS estimators are expressed solely in terms of the observable quantities. Therefore, they
can be easily computed.
2. They are point estimators
3. Once the OLS estimates are obtained from the sample data, the regression line can be easily
obtained. The regression line thus obtained has the following properties:
i. It passes through the sample means of Y and X
ii. The mean value of the estimated Y =Y^ i is equal to the mean value of the actual Y for
Y^ i= β^ 1 + ^β 2 X i
¿(Y − β^ 2 X)+ β^ 2 X i
¿ Y + ^β 2 ( X i− X )
Summing both sides of this last equality over the sample values and dividing through by n give
Y^ ¯¿ Y