School of Economics Mingyang Li

Huazhong University of Science and Technology Spring 2023

Econometrics
Homework 2
Due 17:00 March 15, 2023
Total Points: 100

1. (30 points) Consider the following formulation of the two-variable regression:

Model I: Yi = β1 + β2 Xi + ui
Model II: Yi = α1 + α2 (Xi − X̄) + ui
(a) Find the estimators of β1 and α1 . Are they identical? Are the variances identical?
(b) Find the estimators of β2 and α2 . Are they identical? Are the variances identical?
(c) What is the advantage, if any, of Model II over Model I?
2. (30 points) Regression without any regressor. Suppose you are given the model Yi = β1 + ui .
Use OLS to find the estimator of β1 . What is its variance and the SSR (residual sum of
squares)? Does the estimated β1 make intuitive sense? Now consider the standard two-
variable model we have been discussing in class. Is it worth adding the X variable to the
model? If not, why bother with regression analysis?
3. (40 points) Let β̂Y X and β̂XY represent the slopes in the regression of Y on X (Y = β0 +
βY X X + u) and X on Y (X = α0 + βXY Y + v), respectively. Show that β̂Y X β̂XY = r2 (see
the formula for r below).
P P P
n Xi Yi − Xi Yi
r= p P 2
[n Xi − ( Xi )2 ][n Yi2 − ( Yi )2 ]
P P P