Quantitative Analysis of Financial Markets. Summary of Part II. Key Concepts & Formulas. Christopher Ting. November 11, 2017
|
|
- Justina May
- 5 years ago
- Views:
Transcription
1 Summary of Part II Key Concepts & Formulas Christopher Ting November 11, Christopher Ting 1 of 16
2 Why Regression Analysis? Understand the relationship between two variables (x i, y i ) of interest: y = Xβ + u (1) Is the relationship captured by β statistically significant? Is the statistical significance robust against heteroskedasticity and correlations? Once β estimate is obtained and given any new information x, what would be the point forecast of y? Also, what is the range of forecast? Christopher Ting 2 of 16
3 Matrix-Vector Framework Linear regression model of any number of explanatory variables is most general when it is written as y = Xβ + u. (2) The column vector y contains n observations that are to be explained by n K matrix X of observations inclusive of a column vector of ones (K := k + 1). The parameter vector β has K parameters. The noise vector u has rows. Christopher Ting 3 of 16
4 Regression by Sum of Least Squares of Noise Find β such that the sum of squared noise is as small as possible: β = min β u u = min β ( y Xβ ) ( y Xβ ) (3) Perform vector differentiation with respect to β to obtain the FOC: 2 ( X y X X β ) = 0. The resulting vector of parameter estimates is given by β = ( X X ) 1 X y. (4) Christopher Ting 4 of 16
5 Variance-Covariance Matrix of β Under the assumptions of homoscedasticity, i.e., V ( u ) = σ 2 ui, and E ( u X ) = 0, the variance-covariance matrix of β is V ( β ) = E ( ( β β )( β β ) ) = σ 2 u( X X ) 1. (5) The variance of β i is the i-th diagonal element of the variancecovariance matrix σ 2 u( X X ) 1. Christopher Ting 5 of 16
6 Steps to Compute OLS Standard Errors The variance of noise σ 2 u is unknown and it can be estimated as follows: 1. Compute the fitted values ŷy: 2. Compute the residuals or surprise 3. Compute the residual sum of squares (RSS) ŷy = Xβ (6) ûu = y ŷy (7) RSS = ûu ûu = n û i 2 (8) Christopher Ting 6 of 16
7 4. The variance of the residuals is 5. Let Ω := ( X X ) 1. The variance of βi is σ 2 u = 1 n Kûu ûu (9) V( β i ) = σ 2 uω ii. (10) Christopher Ting 7 of 16
8 Insight! The first-order conditions can be written as ( ) X y X β = 0, which is The OLS residuals are orthogonal to X. X ûu = 0. (11) Consequently, if X has a column vector of ones, then the average of the residuals is zero. This is because there is one row of ones in X and hence n 1 ûu = û i = 0. Christopher Ting 8 of 16
9 Ordinary Least Squares (OLS) s Goodness of Fit Explained sum of squares (ESS) is ESS := Total sum of squares (TSS) is n (ŷi y ) 2 TSS := y y = n ( yi y ) 2 = n (ŷi y ) 2 + n û 2 i (12) = ESS + RSS. (13) n The cross term (ŷi y )( ) y i ŷ i is zero because of the orthogonality: X ûu = 0. Christopher Ting 9 of 16
10 Proof n (ŷi y )( y i ŷ i ) = n (ŷi y ) û i = n ŷ i û i (since y n û i = 0 ) = = n ( ) X β û i i ( ûu X β) = β X ûu = 0. Christopher Ting 10 of 16
11 Properties of OLS Regression ) The estimates are unbiased, i.e., E ( β = β. The variance of the residuals is unbiased E ( σ 2 u) = σ 2 u. Efficiency: According to the Gauss-Markov theorem, among the classical linear regression models, the OLS estimator is the linear unbiased estimator of β with the minimum variance. Conditional normality β X N ( β, σ 2 u(x X) 1) (14) Christopher Ting 11 of 16
12 Statistical Inference For all j = 1, 2,..., K, the t test statistic for β j is β j β j σ u Ωjj t n K (15) Here, Ω := ( X X ) 1, and Ωjj is the j-th diagonal element. The α% significance level for β j is β j q σ u Ωjj β j β j + q σ u Ωjj, where q is the ( 1 α/2 ) -th quantile of the t n K distribution. Christopher Ting 12 of 16
13 Confidence Interval for Mean Response For a given observation x, which is a K 1 vector, the mean response is β x in sample. Given the unbiased estimate β, the variance of β x is V( β ) x ( = V x β ) = x V ( β ) x = σ 2 u x ( X X ) 1 x. (16) Hence, a 100 (1 α)% confidence interval for the in-sample mean response β x is β x ± qσ u x ( X X ) 1 x (17) Christopher Ting 13 of 16
14 Prediction Interval for a New Observation Suppose a future observation of x is obtained. assumption of u N (0, σu), 2 we have ( V y β ) x = V(u) + V( β ) x Then, by (18) Hence a 100 (1 α)% prediction interval for y is β x ± qσ u 1 + x ( X X ) 1 x (19) Christopher Ting 14 of 16
15 R 2 and Adjusted R 2 The coefficient of determination R 2 := ESS TSS = 1 RSS TSS (20) Denoted by R 2, the adjusted R 2 is based on the unbiased variances: RSS R 2 = 1 n K (21) TSS n 1 Christopher Ting 15 of 16
16 Simple Linear Regression: Special Case When K = 2 Slope and intercept estimators b = S xy S xx =: n (x i x)(y i y) n (x i x) 2 ; â = y b x. (22) OLS distribution is â d N a b b, σ 2 u ( ) 1 n + x2 S xx x σu 2 S xx x σu 2 S xx σu 2 S xx (23) Christopher Ting 16 of 16
Simple Linear Regression
Simple Linear Regression Christopher Ting Christopher Ting : christophert@smu.edu.sg : 688 0364 : LKCSB 5036 January 7, 017 Web Site: http://www.mysmu.edu/faculty/christophert/ Christopher Ting QF 30 Week
More informationSimple Linear Regression: The Model
Simple Linear Regression: The Model task: quantifying the effect of change X in X on Y, with some constant β 1 : Y = β 1 X, linear relationship between X and Y, however, relationship subject to a random
More informationINTRODUCTORY ECONOMETRICS
INTRODUCTORY ECONOMETRICS Lesson 2b Dr Javier Fernández etpfemaj@ehu.es Dpt. of Econometrics & Statistics UPV EHU c J Fernández (EA3-UPV/EHU), February 21, 2009 Introductory Econometrics - p. 1/192 GLRM:
More informationEconometrics A. Simple linear model (2) Keio University, Faculty of Economics. Simon Clinet (Keio University) Econometrics A October 16, / 11
Econometrics A Keio University, Faculty of Economics Simple linear model (2) Simon Clinet (Keio University) Econometrics A October 16, 2018 1 / 11 Estimation of the noise variance σ 2 In practice σ 2 too
More informationIntroduction to Estimation Methods for Time Series models. Lecture 1
Introduction to Estimation Methods for Time Series models Lecture 1 Fulvio Corsi SNS Pisa Fulvio Corsi Introduction to Estimation () Methods for Time Series models Lecture 1 SNS Pisa 1 / 19 Estimation
More informationReview of Econometrics
Review of Econometrics Zheng Tian June 5th, 2017 1 The Essence of the OLS Estimation Multiple regression model involves the models as follows Y i = β 0 + β 1 X 1i + β 2 X 2i + + β k X ki + u i, i = 1,...,
More informationLinear Regression. In this problem sheet, we consider the problem of linear regression with p predictors and one intercept,
Linear Regression In this problem sheet, we consider the problem of linear regression with p predictors and one intercept, y = Xβ + ɛ, where y t = (y 1,..., y n ) is the column vector of target values,
More informationThe Simple Regression Model. Part II. The Simple Regression Model
Part II The Simple Regression Model As of Sep 22, 2015 Definition 1 The Simple Regression Model Definition Estimation of the model, OLS OLS Statistics Algebraic properties Goodness-of-Fit, the R-square
More informationSTAT5044: Regression and Anova. Inyoung Kim
STAT5044: Regression and Anova Inyoung Kim 2 / 47 Outline 1 Regression 2 Simple Linear regression 3 Basic concepts in regression 4 How to estimate unknown parameters 5 Properties of Least Squares Estimators:
More informationMultivariate Regression Analysis
Matrices and vectors The model from the sample is: Y = Xβ +u with n individuals, l response variable, k regressors Y is a n 1 vector or a n l matrix with the notation Y T = (y 1,y 2,...,y n ) 1 x 11 x
More informationRecent Advances in the Field of Trade Theory and Policy Analysis Using Micro-Level Data
Recent Advances in the Field of Trade Theory and Policy Analysis Using Micro-Level Data July 2012 Bangkok, Thailand Cosimo Beverelli (World Trade Organization) 1 Content a) Classical regression model b)
More informationTwo-Variable Regression Model: The Problem of Estimation
Two-Variable Regression Model: The Problem of Estimation Introducing the Ordinary Least Squares Estimator Jamie Monogan University of Georgia Intermediate Political Methodology Jamie Monogan (UGA) Two-Variable
More informationLECTURE 2 LINEAR REGRESSION MODEL AND OLS
SEPTEMBER 29, 2014 LECTURE 2 LINEAR REGRESSION MODEL AND OLS Definitions A common question in econometrics is to study the effect of one group of variables X i, usually called the regressors, on another
More informationECON The Simple Regression Model
ECON 351 - The Simple Regression Model Maggie Jones 1 / 41 The Simple Regression Model Our starting point will be the simple regression model where we look at the relationship between two variables In
More informationBusiness Economics BUSINESS ECONOMICS. PAPER No. : 8, FUNDAMENTALS OF ECONOMETRICS MODULE No. : 3, GAUSS MARKOV THEOREM
Subject Business Economics Paper No and Title Module No and Title Module Tag 8, Fundamentals of Econometrics 3, The gauss Markov theorem BSE_P8_M3 1 TABLE OF CONTENTS 1. INTRODUCTION 2. ASSUMPTIONS OF
More informationIntermediate Econometrics
Intermediate Econometrics Heteroskedasticity Text: Wooldridge, 8 July 17, 2011 Heteroskedasticity Assumption of homoskedasticity, Var(u i x i1,..., x ik ) = E(u 2 i x i1,..., x ik ) = σ 2. That is, the
More informationIntroductory Econometrics
Based on the textbook by Wooldridge: : A Modern Approach Robert M. Kunst robert.kunst@univie.ac.at University of Vienna and Institute for Advanced Studies Vienna December 11, 2012 Outline Heteroskedasticity
More informationHeteroskedasticity. Part VII. Heteroskedasticity
Part VII Heteroskedasticity As of Oct 15, 2015 1 Heteroskedasticity Consequences Heteroskedasticity-robust inference Testing for Heteroskedasticity Weighted Least Squares (WLS) Feasible generalized Least
More informationRegression Models - Introduction
Regression Models - Introduction In regression models, two types of variables that are studied: A dependent variable, Y, also called response variable. It is modeled as random. An independent variable,
More information2 Regression Analysis
FORK 1002 Preparatory Course in Statistics: 2 Regression Analysis Genaro Sucarrat (BI) http://www.sucarrat.net/ Contents: 1 Bivariate Correlation Analysis 2 Simple Regression 3 Estimation and Fit 4 T -Test:
More informationP1.T2. Stock & Watson Chapters 4 & 5. Bionic Turtle FRM Video Tutorials. By: David Harper CFA, FRM, CIPM
P1.T2. Stock & Watson Chapters 4 & 5 Bionic Turtle FRM Video Tutorials By: David Harper CFA, FRM, CIPM Note: This tutorial is for paid members only. You know who you are. Anybody else is using an illegal
More informationBasic Econometrics - rewiev
Basic Econometrics - rewiev Jerzy Mycielski Model Linear equation y i = x 1i β 1 + x 2i β 2 +... + x Ki β K + ε i, dla i = 1,..., N, Elements dependent (endogenous) variable y i independent (exogenous)
More informationRegression Models - Introduction
Regression Models - Introduction In regression models there are two types of variables that are studied: A dependent variable, Y, also called response variable. It is modeled as random. An independent
More informationOrdinary Least Squares Regression
Ordinary Least Squares Regression Goals for this unit More on notation and terminology OLS scalar versus matrix derivation Some Preliminaries In this class we will be learning to analyze Cross Section
More informationLecture 14 Simple Linear Regression
Lecture 4 Simple Linear Regression Ordinary Least Squares (OLS) Consider the following simple linear regression model where, for each unit i, Y i is the dependent variable (response). X i is the independent
More informationHomoskedasticity. Var (u X) = σ 2. (23)
Homoskedasticity How big is the difference between the OLS estimator and the true parameter? To answer this question, we make an additional assumption called homoskedasticity: Var (u X) = σ 2. (23) This
More informationSummer School in Statistics for Astronomers V June 1 - June 6, Regression. Mosuk Chow Statistics Department Penn State University.
Summer School in Statistics for Astronomers V June 1 - June 6, 2009 Regression Mosuk Chow Statistics Department Penn State University. Adapted from notes prepared by RL Karandikar Mean and variance Recall
More informationL2: Two-variable regression model
L2: Two-variable regression model Feng Li feng.li@cufe.edu.cn School of Statistics and Mathematics Central University of Finance and Economics Revision: September 4, 2014 What we have learned last time...
More informationLecture 3: Multiple Regression
Lecture 3: Multiple Regression R.G. Pierse 1 The General Linear Model Suppose that we have k explanatory variables Y i = β 1 + β X i + β 3 X 3i + + β k X ki + u i, i = 1,, n (1.1) or Y i = β j X ji + u
More informationXβ is a linear combination of the columns of X: Copyright c 2010 Dan Nettleton (Iowa State University) Statistics / 25 X =
The Gauss-Markov Linear Model y Xβ + ɛ y is an n random vector of responses X is an n p matrix of constants with columns corresponding to explanatory variables X is sometimes referred to as the design
More informationMFin Econometrics I Session 4: t-distribution, Simple Linear Regression, OLS assumptions and properties of OLS estimators
MFin Econometrics I Session 4: t-distribution, Simple Linear Regression, OLS assumptions and properties of OLS estimators Thilo Klein University of Cambridge Judge Business School Session 4: Linear regression,
More informationLinear Regression with 1 Regressor. Introduction to Econometrics Spring 2012 Ken Simons
Linear Regression with 1 Regressor Introduction to Econometrics Spring 2012 Ken Simons Linear Regression with 1 Regressor 1. The regression equation 2. Estimating the equation 3. Assumptions required for
More informationSimple Linear Regression Model & Introduction to. OLS Estimation
Inside ECOOMICS Introduction to Econometrics Simple Linear Regression Model & Introduction to Introduction OLS Estimation We are interested in a model that explains a variable y in terms of other variables
More information4 Multiple Linear Regression
4 Multiple Linear Regression 4. The Model Definition 4.. random variable Y fits a Multiple Linear Regression Model, iff there exist β, β,..., β k R so that for all (x, x 2,..., x k ) R k where ε N (, σ
More informationMS&E 226. In-Class Midterm Examination Solutions Small Data October 20, 2015
MS&E 226 In-Class Midterm Examination Solutions Small Data October 20, 2015 PROBLEM 1. Alice uses ordinary least squares to fit a linear regression model on a dataset containing outcome data Y and covariates
More informationECON3150/4150 Spring 2015
ECON3150/4150 Spring 2015 Lecture 3&4 - The linear regression model Siv-Elisabeth Skjelbred University of Oslo January 29, 2015 1 / 67 Chapter 4 in S&W Section 17.1 in S&W (extended OLS assumptions) 2
More informationthe error term could vary over the observations, in ways that are related
Heteroskedasticity We now consider the implications of relaxing the assumption that the conditional variance Var(u i x i ) = σ 2 is common to all observations i = 1,..., n In many applications, we may
More informationHeteroskedasticity. We now consider the implications of relaxing the assumption that the conditional
Heteroskedasticity We now consider the implications of relaxing the assumption that the conditional variance V (u i x i ) = σ 2 is common to all observations i = 1,..., In many applications, we may suspect
More information. a m1 a mn. a 1 a 2 a = a n
Biostat 140655, 2008: Matrix Algebra Review 1 Definition: An m n matrix, A m n, is a rectangular array of real numbers with m rows and n columns Element in the i th row and the j th column is denoted by
More informationChapter 14. Linear least squares
Serik Sagitov, Chalmers and GU, March 5, 2018 Chapter 14 Linear least squares 1 Simple linear regression model A linear model for the random response Y = Y (x) to an independent variable X = x For a given
More informationLecture 19 Multiple (Linear) Regression
Lecture 19 Multiple (Linear) Regression Thais Paiva STA 111 - Summer 2013 Term II August 1, 2013 1 / 30 Thais Paiva STA 111 - Summer 2013 Term II Lecture 19, 08/01/2013 Lecture Plan 1 Multiple regression
More informationStatistical View of Least Squares
Basic Ideas Some Examples Least Squares May 22, 2007 Basic Ideas Simple Linear Regression Basic Ideas Some Examples Least Squares Suppose we have two variables x and y Basic Ideas Simple Linear Regression
More information3 Multiple Linear Regression
3 Multiple Linear Regression 3.1 The Model Essentially, all models are wrong, but some are useful. Quote by George E.P. Box. Models are supposed to be exact descriptions of the population, but that is
More informationEconometrics I Lecture 3: The Simple Linear Regression Model
Econometrics I Lecture 3: The Simple Linear Regression Model Mohammad Vesal Graduate School of Management and Economics Sharif University of Technology 44716 Fall 1397 1 / 32 Outline Introduction Estimating
More informationMultiple Regression Analysis. Part III. Multiple Regression Analysis
Part III Multiple Regression Analysis As of Sep 26, 2017 1 Multiple Regression Analysis Estimation Matrix form Goodness-of-Fit R-square Adjusted R-square Expected values of the OLS estimators Irrelevant
More informationRegression #2. Econ 671. Purdue University. Justin L. Tobias (Purdue) Regression #2 1 / 24
Regression #2 Econ 671 Purdue University Justin L. Tobias (Purdue) Regression #2 1 / 24 Estimation In this lecture, we address estimation of the linear regression model. There are many objective functions
More informationECON 4230 Intermediate Econometric Theory Exam
ECON 4230 Intermediate Econometric Theory Exam Multiple Choice (20 pts). Circle the best answer. 1. The Classical assumption of mean zero errors is satisfied if the regression model a) is linear in the
More informationCh 2: Simple Linear Regression
Ch 2: Simple Linear Regression 1. Simple Linear Regression Model A simple regression model with a single regressor x is y = β 0 + β 1 x + ɛ, where we assume that the error ɛ is independent random component
More informationFENG CHIA UNIVERSITY ECONOMETRICS I: HOMEWORK 4. Prof. Mei-Yuan Chen Spring 2008
FENG CHIA UNIVERSITY ECONOMETRICS I: HOMEWORK 4 Prof. Mei-Yuan Chen Spring 008. Partition and rearrange the matrix X as [x i X i ]. That is, X i is the matrix X excluding the column x i. Let u i denote
More informationRegression Analysis. y t = β 1 x t1 + β 2 x t2 + β k x tk + ϵ t, t = 1,..., T,
Regression Analysis The multiple linear regression model with k explanatory variables assumes that the tth observation of the dependent or endogenous variable y t is described by the linear relationship
More informationHOW IS GENERALIZED LEAST SQUARES RELATED TO WITHIN AND BETWEEN ESTIMATORS IN UNBALANCED PANEL DATA?
HOW IS GENERALIZED LEAST SQUARES RELATED TO WITHIN AND BETWEEN ESTIMATORS IN UNBALANCED PANEL DATA? ERIK BIØRN Department of Economics University of Oslo P.O. Box 1095 Blindern 0317 Oslo Norway E-mail:
More informationMicroeconometria Day # 5 L. Cembalo. Regressione con due variabili e ipotesi dell OLS
Microeconometria Day # 5 L. Cembalo Regressione con due variabili e ipotesi dell OLS Multiple regression model Classical hypothesis of a regression model: Assumption 1: Linear regression model.the regression
More informationWeighted Least Squares
Weighted Least Squares The standard linear model assumes that Var(ε i ) = σ 2 for i = 1,..., n. As we have seen, however, there are instances where Var(Y X = x i ) = Var(ε i ) = σ2 w i. Here w 1,..., w
More informationModel Mis-specification
Model Mis-specification Carlo Favero Favero () Model Mis-specification 1 / 28 Model Mis-specification Each specification can be interpreted of the result of a reduction process, what happens if the reduction
More informationSimple Linear Regression
Simple Linear Regression ST 430/514 Recall: A regression model describes how a dependent variable (or response) Y is affected, on average, by one or more independent variables (or factors, or covariates)
More informationLecture notes to Stock and Watson chapter 4
Lecture notes to Stock and Watson chapter 4 Introductory linear regression Tore Schweder Sept 2009 TS () LN3 03/09 1 / 15 Regression "Regression" is due to Francis Galton (1822-1911): how is a son s height
More informationSo far our focus has been on estimation of the parameter vector β in the. y = Xβ + u
Interval estimation and hypothesis tests So far our focus has been on estimation of the parameter vector β in the linear model y i = β 1 x 1i + β 2 x 2i +... + β K x Ki + u i = x iβ + u i for i = 1, 2,...,
More informationMA 575 Linear Models: Cedric E. Ginestet, Boston University Midterm Review Week 7
MA 575 Linear Models: Cedric E. Ginestet, Boston University Midterm Review Week 7 1 Random Vectors Let a 0 and y be n 1 vectors, and let A be an n n matrix. Here, a 0 and A are non-random, whereas y is
More informationThe Multiple Regression Model Estimation
Lesson 5 The Multiple Regression Model Estimation Pilar González and Susan Orbe Dpt Applied Econometrics III (Econometrics and Statistics) Pilar González and Susan Orbe OCW 2014 Lesson 5 Regression model:
More informationHeteroskedasticity and Autocorrelation
Lesson 7 Heteroskedasticity and Autocorrelation Pilar González and Susan Orbe Dpt. Applied Economics III (Econometrics and Statistics) Pilar González and Susan Orbe OCW 2014 Lesson 7. Heteroskedasticity
More informationBusiness Statistics. Tommaso Proietti. Linear Regression. DEF - Università di Roma 'Tor Vergata'
Business Statistics Tommaso Proietti DEF - Università di Roma 'Tor Vergata' Linear Regression Specication Let Y be a univariate quantitative response variable. We model Y as follows: Y = f(x) + ε where
More informationEconometrics of Panel Data
Econometrics of Panel Data Jakub Mućk Meeting # 4 Jakub Mućk Econometrics of Panel Data Meeting # 4 1 / 30 Outline 1 Two-way Error Component Model Fixed effects model Random effects model 2 Non-spherical
More informationEmpirical Market Microstructure Analysis (EMMA)
Empirical Market Microstructure Analysis (EMMA) Lecture 3: Statistical Building Blocks and Econometric Basics Prof. Dr. Michael Stein michael.stein@vwl.uni-freiburg.de Albert-Ludwigs-University of Freiburg
More informationRegression. ECO 312 Fall 2013 Chris Sims. January 12, 2014
ECO 312 Fall 2013 Chris Sims Regression January 12, 2014 c 2014 by Christopher A. Sims. This document is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License What
More informationEconometrics of Panel Data
Econometrics of Panel Data Jakub Mućk Meeting # 1 Jakub Mućk Econometrics of Panel Data Meeting # 1 1 / 31 Outline 1 Course outline 2 Panel data Advantages of Panel Data Limitations of Panel Data 3 Pooled
More informationEconomics 113. Simple Regression Assumptions. Simple Regression Derivation. Changing Units of Measurement. Nonlinear effects
Economics 113 Simple Regression Models Simple Regression Assumptions Simple Regression Derivation Changing Units of Measurement Nonlinear effects OLS and unbiased estimates Variance of the OLS estimates
More informationstatistical sense, from the distributions of the xs. The model may now be generalized to the case of k regressors:
Wooldridge, Introductory Econometrics, d ed. Chapter 3: Multiple regression analysis: Estimation In multiple regression analysis, we extend the simple (two-variable) regression model to consider the possibility
More informationAnalisi Statistica per le Imprese
, Analisi Statistica per le Imprese Dip. di Economia Politica e Statistica 4.3. 1 / 33 You should be able to:, Underst model building using multiple regression analysis Apply multiple regression analysis
More informationEssential of Simple regression
Essential of Simple regression We use simple regression when we are interested in the relationship between two variables (e.g., x is class size, and y is student s GPA). For simplicity we assume the relationship
More informationHeteroscedasticity. Jamie Monogan. Intermediate Political Methodology. University of Georgia. Jamie Monogan (UGA) Heteroscedasticity POLS / 11
Heteroscedasticity Jamie Monogan University of Georgia Intermediate Political Methodology Jamie Monogan (UGA) Heteroscedasticity POLS 7014 1 / 11 Objectives By the end of this meeting, participants should
More informationQuestions and Answers on Heteroskedasticity, Autocorrelation and Generalized Least Squares
Questions and Answers on Heteroskedasticity, Autocorrelation and Generalized Least Squares L Magee Fall, 2008 1 Consider a regression model y = Xβ +ɛ, where it is assumed that E(ɛ X) = 0 and E(ɛɛ X) =
More informationScatter plot of data from the study. Linear Regression
1 2 Linear Regression Scatter plot of data from the study. Consider a study to relate birthweight to the estriol level of pregnant women. The data is below. i Weight (g / 100) i Weight (g / 100) 1 7 25
More informationIntermediate Econometrics
Intermediate Econometrics Markus Haas LMU München Summer term 2011 15. Mai 2011 The Simple Linear Regression Model Considering variables x and y in a specific population (e.g., years of education and wage
More informationMultiple Regression Analysis
Chapter 4 Multiple Regression Analysis The simple linear regression covered in Chapter 2 can be generalized to include more than one variable. Multiple regression analysis is an extension of the simple
More informationReference: Davidson and MacKinnon Ch 2. In particular page
RNy, econ460 autumn 03 Lecture note Reference: Davidson and MacKinnon Ch. In particular page 57-8. Projection matrices The matrix M I X(X X) X () is often called the residual maker. That nickname is easy
More informationReview of Classical Least Squares. James L. Powell Department of Economics University of California, Berkeley
Review of Classical Least Squares James L. Powell Department of Economics University of California, Berkeley The Classical Linear Model The object of least squares regression methods is to model and estimate
More informationStatistics II Exercises Chapter 5
Statistics II Exercises Chapter 5 1. Consider the four datasets provided in the transparencies for Chapter 5 (section 5.1) (a) Check that all four datasets generate exactly the same LS linear regression
More informationChapter 2: simple regression model
Chapter 2: simple regression model Goal: understand how to estimate and more importantly interpret the simple regression Reading: chapter 2 of the textbook Advice: this chapter is foundation of econometrics.
More informationPeter Hoff Linear and multilinear models April 3, GLS for multivariate regression 5. 3 Covariance estimation for the GLM 8
Contents 1 Linear model 1 2 GLS for multivariate regression 5 3 Covariance estimation for the GLM 8 4 Testing the GLH 11 A reference for some of this material can be found somewhere. 1 Linear model Recall
More informationLinear Regression Spring 2014
Linear Regression 18.05 Spring 2014 Agenda Fitting curves to bivariate data Measuring the goodness of fit The fit vs. complexity tradeoff Regression to the mean Multiple linear regression January 1, 2017
More informationEconometrics Summary Algebraic and Statistical Preliminaries
Econometrics Summary Algebraic and Statistical Preliminaries Elasticity: The point elasticity of Y with respect to L is given by α = ( Y/ L)/(Y/L). The arc elasticity is given by ( Y/ L)/(Y/L), when L
More informationMA 575 Linear Models: Cedric E. Ginestet, Boston University Mixed Effects Estimation, Residuals Diagnostics Week 11, Lecture 1
MA 575 Linear Models: Cedric E Ginestet, Boston University Mixed Effects Estimation, Residuals Diagnostics Week 11, Lecture 1 1 Within-group Correlation Let us recall the simple two-level hierarchical
More informationRegression and Statistical Inference
Regression and Statistical Inference Walid Mnif wmnif@uwo.ca Department of Applied Mathematics The University of Western Ontario, London, Canada 1 Elements of Probability 2 Elements of Probability CDF&PDF
More informationBANA 7046 Data Mining I Lecture 2. Linear Regression, Model Assessment, and Cross-validation 1
BANA 7046 Data Mining I Lecture 2. Linear Regression, Model Assessment, and Cross-validation 1 Shaobo Li University of Cincinnati 1 Partially based on Hastie, et al. (2009) ESL, and James, et al. (2013)
More informationMIT Spring 2015
Regression Analysis MIT 18.472 Dr. Kempthorne Spring 2015 1 Outline Regression Analysis 1 Regression Analysis 2 Multiple Linear Regression: Setup Data Set n cases i = 1, 2,..., n 1 Response (dependent)
More informationThe Statistical Property of Ordinary Least Squares
The Statistical Property of Ordinary Least Squares The linear equation, on which we apply the OLS is y t = X t β + u t Then, as we have derived, the OLS estimator is ˆβ = [ X T X] 1 X T y Then, substituting
More informationHeteroscedasticity and Autocorrelation
Heteroscedasticity and Autocorrelation Carlo Favero Favero () Heteroscedasticity and Autocorrelation 1 / 17 Heteroscedasticity, Autocorrelation, and the GLS estimator Let us reconsider the single equation
More informationScatter plot of data from the study. Linear Regression
1 2 Linear Regression Scatter plot of data from the study. Consider a study to relate birthweight to the estriol level of pregnant women. The data is below. i Weight (g / 100) i Weight (g / 100) 1 7 25
More informationEconometrics I KS. Module 2: Multivariate Linear Regression. Alexander Ahammer. This version: April 16, 2018
Econometrics I KS Module 2: Multivariate Linear Regression Alexander Ahammer Department of Economics Johannes Kepler University of Linz This version: April 16, 2018 Alexander Ahammer (JKU) Module 2: Multivariate
More informationIn the bivariate regression model, the original parameterization is. Y i = β 1 + β 2 X2 + β 2 X2. + β 2 (X 2i X 2 ) + ε i (2)
RNy, econ460 autumn 04 Lecture note Orthogonalization and re-parameterization 5..3 and 7.. in HN Orthogonalization of variables, for example X i and X means that variables that are correlated are made
More informationCorrelation in Linear Regression
Vrije Universiteit Amsterdam Research Paper Correlation in Linear Regression Author: Yura Perugachi-Diaz Student nr.: 2566305 Supervisor: Dr. Bartek Knapik May 29, 2017 Faculty of Sciences Research Paper
More informationMeasuring the fit of the model - SSR
Measuring the fit of the model - SSR Once we ve determined our estimated regression line, we d like to know how well the model fits. How far/close are the observations to the fitted line? One way to do
More informationWeighted Least Squares
Weighted Least Squares The standard linear model assumes that Var(ε i ) = σ 2 for i = 1,..., n. As we have seen, however, there are instances where Var(Y X = x i ) = Var(ε i ) = σ2 w i. Here w 1,..., w
More informationSimple Linear Regression
Simple Linear Regression Reading: Hoff Chapter 9 November 4, 2009 Problem Data: Observe pairs (Y i,x i ),i = 1,... n Response or dependent variable Y Predictor or independent variable X GOALS: Exploring
More informationEstimation of the Response Mean. Copyright c 2012 Dan Nettleton (Iowa State University) Statistics / 27
Estimation of the Response Mean Copyright c 202 Dan Nettleton (Iowa State University) Statistics 5 / 27 The Gauss-Markov Linear Model y = Xβ + ɛ y is an n random vector of responses. X is an n p matrix
More informationLecture 24: Weighted and Generalized Least Squares
Lecture 24: Weighted and Generalized Least Squares 1 Weighted Least Squares When we use ordinary least squares to estimate linear regression, we minimize the mean squared error: MSE(b) = 1 n (Y i X i β)
More informationWe can relax the assumption that observations are independent over i = firms or plants which operate in the same industries/sectors
Cluster-robust inference We can relax the assumption that observations are independent over i = 1, 2,..., n in various limited ways One example with cross-section data occurs when the individual units
More informationMAT2377. Rafa l Kulik. Version 2015/November/26. Rafa l Kulik
MAT2377 Rafa l Kulik Version 2015/November/26 Rafa l Kulik Bivariate data and scatterplot Data: Hydrocarbon level (x) and Oxygen level (y): x: 0.99, 1.02, 1.15, 1.29, 1.46, 1.36, 0.87, 1.23, 1.55, 1.40,
More informationEcon 620. Matrix Differentiation. Let a and x are (k 1) vectors and A is an (k k) matrix. ) x. (a x) = a. x = a (x Ax) =(A + A (x Ax) x x =(A + A )
Econ 60 Matrix Differentiation Let a and x are k vectors and A is an k k matrix. a x a x = a = a x Ax =A + A x Ax x =A + A x Ax = xx A We don t want to prove the claim rigorously. But a x = k a i x i i=
More informationRegression Analysis: Basic Concepts
The simple linear model Regression Analysis: Basic Concepts Allin Cottrell Represents the dependent variable, y i, as a linear function of one independent variable, x i, subject to a random disturbance
More information