Regression Analysis

Classical Linear Regression Model: Assumptions

• The regression model is linear in the

parameters
• The mean or expected value of the random
disturbance terms ui is zero.
• Given the value of x, the variance of ui is the
same for all observation
• No autocorrelation between any two ui and uj
• Zero covariance between error term and
independent variables
Assumptions Cont….
• The number of observations must be number
of parameters to be estimated

• The is no perfect linear relationship among

explanatory variables (Multicollinearity)