SIMPLE REGRESSION MODEL (3)

SEEQ2023
BASIC ECONOMETRIC
 PRECISION OR STANDARD ERRORS OF OLS
ESTIMATES
• OLS estimates are function of the sample data.
• Since data likely to change from sample to sample - the
estimates will change.
• We needed some measure of “reliability” or precision of the
estimators and .
• In statistics, the precision of an estimates is measured by its
standard error (se).
 STANDARD ERRORS

• Standard errors of the OLS estimates can be obtained as

follows:

• All the quantities in equations can be calculated/estimated

from the data except .
 STANDARD ERRORS

• But the itself can be estimated by following formula:

• Where is OLS estimator of the true but unknown .

• known as the number of degree of freedom (df), where
k is coefficient.
• Once is known, can be easily computed.
 STANDARD ERRORS

• Note that, the positive square root of :

• is known as the standard error of estimate or standard error

of the regression (se).
• Its is simply the standard deviation of the Y values about the
estimate regression line.
 THE GAUSS-MARKOV THEOREM
• Assumption of CLRM – the least-squares estimates posses
some ideal or optimum properties.
• Properties – contained well-known Gauss-Markov theorem.
• OLS estimator is said to be best linear unbiased estimator
(BLUE) of if the following hold:
– It is linear. A linear function of a random variable.
– It is unbiased. Its average or expected value, , is equal to the
true value, .
– It has minimum variance. An unbiased estimator with the least
variance is known as an efficient estimator.
• In regression context, it can be proved that the OLS
estimators are BLUE.