Professional Documents
Culture Documents
M ULTIPLE R EGRESSION
Econometrics I - Exercise 2
Lubomr Cingl
March 4, 2014
R EVISION
M ULTIPLE R EGRESSION
R EVISION
I
y = 0 + 1 x + u
y dependent / explained
u error term
0 intercept
1 slope
(1)
R EVISION
M ULTIPLE R EGRESSION
A SSUMPTIONS
R EVISION
M ULTIPLE R EGRESSION
R EVISION
M ULTIPLE R EGRESSION
yi = 0 + 1 xi + ui
I
(2)
R EVISION
M ULTIPLE R EGRESSION
F ORMULAS TO KNOW
I
intercept
0 =
y 1
x
(3)
slope
n
P
1 =
(xi
x)(yi
y)
i=1
n
P
(4)
(xi
x)2
i=1
if
n
P
i=1
I
R EVISION
M ULTIPLE R EGRESSION
= 0.33 + 0.56edu
e.g. inc
R EVISION
M ULTIPLE R EGRESSION
R SQUARED
R2 = SSE/SST = 1 SSR/SST
I
I
I
R EVISION
M ULTIPLE R EGRESSION
Unbiased
I
I
Variance
I
I
I
expected value
of estimator is its true value
P
(xi
x)ui
P
1 = 1 + (xi
= 1
x)2
Assume homoskedasticity Var(u|x) = 2
2 is the error
Pvariance
Var1 = 2 / (xi
x) = 2 /sx 2
2 = 1/(n 2) u1 2 = SSR/(n 2)
P
P
Var1 = 2 / (xi
x) = 1/(n 2) u1 2 /sx 2
R EVISION
M ULTIPLE R EGRESSION
E XAMPLE 2.7
Consider the savings function
sav = 0 + 1 inc + u, u =
inc e
(5)
R EVISION
M ULTIPLE R EGRESSION
I NTERPRETATION
linear function
I
y = 0 + 1 x
marginal effect of x on y
natural log
I
y = log(x); x > 0
1 is elasticity of y w.r.t. x
R EVISION
M ULTIPLE R EGRESSION
E XAMPLE 2.6
Using data from 1988 for houses sold close to garbage mill,
following equation relates housing price to distance from
garbage incinerator:
= 9.4 + 0.312log(dist); n = 135; R2 = 0.162
log(price)
(6)
R EVISION
M ULTIPLE R EGRESSION
we know that
n
P
1 =
(xi
x)(yi
y)
i=1
n
P
(7)
(xi
x)2
i=1
1 =
(xi )(yi )
i=1
n
P
(8)
(xi
i=1
)2
R EVISION
M ULTIPLE R EGRESSION
E XAMPLE 2.8
Consider standard simple regression model with standard
assumptions met. Let 1 be the estimator of 1 obtained by
assuming the intercept is zero.
1. Find E(1 ) in terms of the xi , 0 , and 1 . Verify that 1 is
unbiased for 1 when the population intercept 0 is zero.
Are there other cases where 1 is unbiased?
2. Find the variance of 1 . Hint: It does not depend on 0 .
P
P
3. Show that Var(1 ) Var(1 ). Hint: (xi )2 (xi x)2
with strict inequality unless
x = 0.
4. Comment on the trade-off between bias and variance
when choosing between 1 and 1 .
R EVISION
M ULTIPLE R EGRESSION
E XAMPLE 2.9
R EVISION
M ULTIPLE R EGRESSION
E XAMPLE 2.9
R EVISION
M ULTIPLE R EGRESSION
Multiple regression
R EVISION
M ULTIPLE R EGRESSION
y dependent / explained
u error term
0 intercept
1 ,2 , ... slopes
Interpretation:
y = 1 x1
(9)
R EVISION
M ULTIPLE R EGRESSION
E XAMPLE I
partial effect
(10)
R EVISION
M ULTIPLE R EGRESSION
E XAMPLE II
(11)
R EVISION
M ULTIPLE R EGRESSION
A SSUMPTIONS
I
I
R EVISION
M ULTIPLE R EGRESSION
(12)
(13)
R EVISION
M ULTIPLE R EGRESSION
P ROPERTIES
R EVISION
M ULTIPLE R EGRESSION
y = 0 + 1 x1 + 2 x2 + u
y = 0 + 1 x1
P
(xi1 x1 )xi2
E(1 ) = 1 + 2 P
= 1 + 2 1
(xi1 x1 )2
R EVISION
M ULTIPLE R EGRESSION
VARIANCE
I
I
I
2 = 1/(n k 1)
2
Varj = SST (1R
2)
j
sej =
SSTj (1R2j )
u1 2 = SSR/df
(14)
R EVISION
M ULTIPLE R EGRESSION
E XAMPLE 3.9
The following equation describes the median housing price in a
community in terms of amount of pollution (nox for nitrous
oxide) and the average number of rooms in houses in the
community (rooms):
log(price) = 0 + 1 log(nox) + 2 rooms + u
R EVISION
M ULTIPLE R EGRESSION
E XAMPLE 3.9
3. Using the data in HPRICE2.RAW, the following equations
were estimated:
= 11.71 1.043log(nox), n = 506, R2 = 0.264
log(price)
= 9.230.718log(nox)+0.306rooms, n = 506, R2 = 0.514
log(price)
Is the relationship between the simple and multiple regression
estimates of the elasticity of price with respect to nox what you
would have predicted, given your answer in part 2.? Does this
mean that -0.718 is definitely closer to the true elasticity than
-1.043?
R EVISION
M ULTIPLE R EGRESSION
E XAMPLE 3.12
1. Consider the simple regression model y = 0 + 1 x + u under
the first four Gauss-Markov assumptions. For some function
g(x), for example g(x) = x2 or g(x) = log(1 + x2 ) define
zi = g(xi ). Define a slope estimator as
X
X
1 =
(zi z)yi /
(zi z)xi
Show that 1 is linear and unbiased. Remember, because
E(u|x) = 0, you can treat both xi and zi as nonrandom in your
derivation.
2. Add the homoskedasticity assumption, MLR.5. Show that
X
X
Var(1 ) = ( (zi z)2 )/( (zi z)xi )2
R EVISION
M ULTIPLE R EGRESSION
E XAMPLE 3.12
R EVISION
M ULTIPLE R EGRESSION
E XAMPLE 3.15
The file CEOSAL2.RAW contains data on 177 chief executive
officers, which can be used to examine the effects of firm
performance on CEO salary.
1. Estimate a model relating annual salary to firm sales and
market value. Make the model of the constant elasticity
variety for both independent variables. Write the results
out in equation form.
2. Add profits to the model from part 1. Why can this
variable not be included in logarithmic form? Would you
say that these firm performance variables explain most of
the variation in CEO salaries?
R EVISION
M ULTIPLE R EGRESSION
E XAMPLE 3.15