Chap 5 The Multiple Regression Model

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Chap 5 The Multiple Regression Model Econometrics (NA1031) Chap 5 The Multiple Regression Model

Multiple regression An example of an economic model is: The econometric model: e = SALES - E(SALES)

FIGURE 5.1 The multiple regression plane

Multiple regression In a general multiple regression model, a dependent variable y is related to a number of explanatory variables x2, x3, …, xK through a linear equation that can be written as: A single parameter, call it βk, measures the effect of a change in the variable xk upon the expected value of y, all other variables held constant

Assumptions MR1. MR2. MR3. MR4. MR5. The values of each xtk are not random and are not exact linear functions of the other explanatory variables MR6.

Estimation by OLS Say two explanatory variables in the model: Minimize

Least squares estimators Are random variables and have sampling properties. According to Gauss-Markov theorem if assumptions MR1–MR5 hold, then the least squares estimators are the best linear unbiased estimators (BLUE) of the parameters. For example it can be shown that:

Least squares estimators We can see that: Larger error variances 2 lead to larger variances of the least squares estimators Larger sample sizes N imply smaller variances of the least squares estimators More variation in an explanatory variable around its mean, leads to a smaller variance of the least squares estimator A larger correlation between x2 and x3 leads to a larger variance of b2 Exact collinearity when correlation between x2 and x3 is perfect (i.e. =1)

Least squares estimators We can arrange the variances and covariances in a matrix format: Using estimates of these we can construct interval estimates and conduct hypothesis testing as we did for the simple regression model.

Stata Start Stata mkdir C:\PE cd C:\PE copy http://users.du.se/~rem/chap05_15.do chap05_15.do doedit chap05_15.do

Assignment Exercise 5.12, 5.13.a, 5.13.b.i, 5.13.b.ii, page 204 and 205 in the textbook.