Review Questions

Note: Different from your HW questions, you should NOT use the weights of the
review questions set as references of the questions in the final exam.
They are picked by the following standard: 1) the common errors we saw in HWs;
2) the more difficult to comprehend parts in the materials; 3) the parts that you
might want to focus on during reviewing.

1. A multiple regression of y on a constant x1 and x2 produces the following

� +0.9x2
results: 𝑦𝑦� =4+0.4x1 � , R2=8/60, e’e=520, n=29.
29 0 0
X′X=� 0 50 10�
0 10 80
Test the hypothesis that the two slopes sum to 1.

2. Consider a data set consisting of N observations, with a missing observation.

The missing observation is ym, all the X values are not missing. We are applying
the N observations to estimate the linear regression model Y=Xβ+ε. Suppose that
we first regress the part of y that is not missing, ynot missing (y values that are not
missing), on the corresponding part of X, Xnot missing and compute bnot missing. Next,
we use xm to predict the missing ym with xm bnot missing. Now, with the estimated ym,
we regress the full sample of observations, y on X, and get b.
(1) Show that bnot missing and b are the same.
(2) Prove that bnot missing is unbiased.
3. Suppose you are interested in studying how private network connections
among analysts and CFOs could help analysts better predict stock prices, design a
dif-in-dif test that could help you identify such an effect.
Hint: Try Googling “Regulation FD” in the US.

4. Suppose you obtain the following results from regressing y on an intercept, x,

and w: 𝑦𝑦�=2+3x+4w, with 𝑅𝑅 2 = 0.8 and residuals denoted 𝑒𝑒̂ .
(1) (4 points) What coefficient estimates and 𝑅𝑅2 result from regressing 𝑒𝑒̂ on
an intercept, x and w?
(2) (3 points) What coefficient estimates and 𝑅𝑅2 result from regressing y on
an intercept, and 𝑦𝑦�?
(3) (3 points) What coefficient estimates and 𝑅𝑅2 result from regressing y on
an intercept, and 𝑒𝑒̂ ?

5. Suppose y=𝛽𝛽𝛽𝛽 + 𝜀𝜀 and a set of instrumental variables Z is available for X.

(1) Show that 𝛽𝛽 𝐼𝐼𝐼𝐼 can be obtained by regressing y on W, the predicted values
of X resulting from a regression of X on Z.
(2) Use the result of (1) to suggest a formula for the variance-covariance
matrix of the instrumental variable estimator.

6. As the sample size grows, 𝑅𝑅 2 should fall. True, false, or uncertain? Explain.