The Simple Linear Regression Model Specification and Estimation
- Slides: 19
The Simple Linear Regression Model Specification and Estimation Hill et al Chs 3 and 4
Expenditure by households of a given income on food
Economic Model • Assume that the relationship between income and food expenditure is linear: • But, expenditure is random: • Known as the regression function.
Econometric model
Econometric model • Combines the economic model with assumptions about the random nature of the data. • Dispersion. • Independence of yi and y j. • xi is non-random.
Writing the model with an error term • An observation can be decomposed into a systematic part: – the mean; • and a random part:
Properties of the error term
Assumptions of the simple linear regression model
The error term • Unobservable (we never know E(y)) • Captures the effects of factors other than income on food expenditure: – Unobservered factors. – Approximation error as a consequence of the linear function. – Random behaviour.
Fitting a line
The least squares principle • Fitted regression and predicted values: • Estimated residuals: • Sum of squared residuals:
The least squares estimators
Least Squares Estimates • When data are used with the estimators, we obtain estimates. • Estimates are a function of the yt which are random. • Estimates are also random, a different sample with give different estimates. • Two questions: – What are the means, variances and distributions of the estimates. – How does the least squares rule compare with other rules.
Expected value of b 2 Estimator for b 2 can be written: Taking expectations:
Variances and covariances
Comparing the least squares estimators with other estimators Gauss-Markov Theorem: Under the assumptions SR 1 -SR 5 of the linear regression model the estimators b 1 and b 2 have the smallest variance of all linear and unbiased estimators of 1 and 2. They are the Best Linear Unbiased Estimators (BLUE) of 1 and 2
The probability distribution of least squares estimators • Random errors are normally distributed: – estimators are a linear function of the errors, hence they a normal too. • Random errors not normal but sample is large: – asymptotic theory shows the estimates are approximately normal.
Estimating the variance of the error term
Estimating the variances and covariances of the LS estimators
- Simple and multiple linear regression
- Logistic regression vs linear regression
- Logistic regression vs linear regression
- Regression linear model
- Least square method
- Upper specification limit and lower specification limit
- Natural variations operations management
- Null hypothesis for linear regression
- Simple linear regression excel
- Simple linear regression
- Simple linear regression
- Linear regression assumptions spss
- Define multiple regression
- R-squared interpretation example
- Log linear regression model
- Log linear regression model
- Assumption of classical linear regression model
- Classical normal linear regression model
- Kr
- Linear regression model validation techniques