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Question 4 (A) What Are The Stochastic Assumption of The Ordinary Least Squares? Assumption 1

The stochastic assumptions of ordinary least squares regression are: 1) The regression model is linear in parameters 2) The X values are fixed in repeated sampling 3) The mean of the disturbance term is zero 4) The variance of the disturbance term is the same for all observations 5) There is no autocorrelation between disturbance terms 6) There is zero covariance between the disturbance term and the X values

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98 views9 pages

Question 4 (A) What Are The Stochastic Assumption of The Ordinary Least Squares? Assumption 1

The stochastic assumptions of ordinary least squares regression are: 1) The regression model is linear in parameters 2) The X values are fixed in repeated sampling 3) The mean of the disturbance term is zero 4) The variance of the disturbance term is the same for all observations 5) There is no autocorrelation between disturbance terms 6) There is zero covariance between the disturbance term and the X values

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QUESTION 4 (A)

What are the stochastic assumption of the ordinary least squares?


Assumption 1
Linear regression model: The regression model is linear in the parameters.
Y 1 2 x1 1
Equation posits that the consumption expenditure of a family is linearly related to its
income plus the disturbance term.
Assumption 2
X values are fixed in repeated sampling values taken by the regressor x are considered
fixed in repeated samples. More technically x is assumed to be non stochastic.
Assumption 3
Zero mean value of disturbance i. Given the value of x, the mean or expected value of
the random disturbance term i is zero. Technically, the conditional mean value of i is
zero, symbolically we have:

i 0
x1

E
Assumption 4

Homoscedasticity or equal variance of i given the value of x the variances of i is the


same for all observations. That is, the conditional variances of i are identical
symbolically we have:

i E ( E ( ) x )]2 E ( 2 ( x )
i
i
1
i
i
x1

var

Assumption 5
No autocorrelation between the disturbances given any two x values x 1 and x1(ij) the
correlation between any two i and i(ii) is zero, symbolically we have:
cov

i i

E[ E ( )] E ( )]/ x }
i
j i
i
j
xi .xi

= E (i/x)( j/xj)
Assumption 6
Zero covariances between i and xi or E = (ixi) = 0
cov i , xi E[ i E ( i )][ xi E ( xi )]
E[ i ( xi E ( xi ))]
Since E () = 0
Assumption 7
The number of observations n must be greater than the number of parameters to be
estimated. Alternatively, the number of observation n must be greater than the number
of explanatory variables.
Assumption 8
Variability in x values: the x values in a given sample must not all be the same.
Technically var(x) must be a finite positive number.
Assumption 9
The regression model is correctly specified: alternatively there is no specification basis
or error in the model used in empirical analysis.
Assumption 10
There is no perfect multi-colanarity that is there are no perfect linear relationship
among the explanatory variables.

QUESTION 4 (B)
Explain the Gauss Markov Theorem of the regression model
Properties of least squares estimator the Gauss Markov Theorem
Given the assumption of the classical linear regression model, the least squares
estimates posses some ideal or optimum properties. These properties are contained in
the well known Gauss Markov Theorem.
To understand this theorem we need to consider the best linear unbiasedness property
of an estimator, an estimator say the OLS estimator 2 is said to be a best linear
unbiased estimator (blue) of 2 is the following hold.

It is linear, that is a linear function of a random variable such as the dependent


variable in the regression model.

It is unbiased, that is its average or expected value, E( B ) is equal to the true


value 2.

It has minimum variance on the class of all such linear unbiased estimator, an
unbiased estimator with the least variances is known as an efficient estimator.

QUESTION 2
Given the following information, compute correlation coefficient between quantity
supplied and price and interept its result.
Time

10

Q. Supply

10

20

50

40

50

60

80

90

90

120

Price

10

12

14

16

18

20

Solution
Correlation
If two sets of variables vary ion such a way that the chances of one set are related by
changes in the other them theses set are said to be correlated.
r

( x x )( y y )
( x x ) 2 ( y y ) 2

Example of correlations
There is a relationship between income and expenditure, height and weight, rainfall and
production, supply and price etc.
Generally speaking correlation measures the degree of relationship between the two
variables.
x

x2

y2

xy

10

100

20

20

400

16

80

50

2500

36

300

40

1600

64

320

50

10

2500

100

500

60

12

3600

144

720

80

14

6400

196

1120

90

16

8100

256

1440

90

18

8100

324

1620

120

20

14400

400

2400

610

110

47,700

1540

8520

610

110

x2

47,700

y2

1540

xy

8520

x x 610 61
n
10
y x 110 11
n
10
n 10
Substitutes theses calculated values in formula

n xy ( x)( y )
n x 2 ( x)2 n y 2 ( y ) 2
(10)(8520) (610)(110)
(10)(47700) (610) 2 (10)(5140) (110) 2

85200 67100
477000 372100 15400 12100
18100
r
104900. 3300
r

18100
(323.88)(57.44)

18100
18603.82

r 0.9729
Result = strong degree of association
Coefficient of correlation

Degree of association

0.8 to + 1

Strong

+ 0.5 to + 0.8

Moderate

+ 0.2 to + 0.5

Weak

+ 0 to + 0.2

Negligible

Differentiate between regression and correlation


Regression

The dependence of one variable over the other variable is termed as regression.

Regression is a statistical device which helps us in estimating or predicting the


unknown value of one variable provided the value of other variable is given to
us.

The variable whose value is to be estimated in called dependent variable (y)


whereas the variable whose value is given is called independent variable (x).

In regression analysis there is asymmetry in the way the dependent and


explanatory variables are treated.

The dependent variable is assumed to be statistical, random or stochastic, that is


to have a probability distribution. The explanatory variables, on the other hand
are assumed to be fixed values.

Correlation

If two sets of variable vary in such a way that the changes of one set are related
by changes in the other then these sets are said to be correlated.

Correlation measures the degree of relationship between the two variables.

Primary objective is to measure the strength or degree of association between


two variables.

There is no distinction between the dependent and explanatory variables. Both


variables are assumed to be random.

Most of the correlation theory is based on the assumption of randomness of


variable.

Question 5
Differentiate between simple correlation and rank correlation
Simple correlation
Simple correlation generally speaking measures the degree of relationship between the
two variables. If two sets of variables vary in such a way that the changes of one sets
are related by changes in the other than theses sets are said to be correlated.
Properties of coefficient of correlation
The coefficient of correlation always varies from -1 to +1 i.e. -1< r < 1.
Rank correlation
When there is no unit of measurement in the magnitudes of two variables or in other
words when the direct measurements of the variable are not possible.
Numerical question
Students

Previous

10

Final

10

d= x-y

d2

6-3=3

7-4=3

10

10-8=2

9-9=0

5-7=-2

4-5=-1

8-6=2

10

2-10=-8

64

3-5=-2

1-5=-4

16

115

Therefore

d 2 115

Now
6d2
n(n 2 1)
6(115)
r 1
10(102 1)
6(115)
r 1
10(100 1)
690
r 1
10(99)
690
r 1
990
r 1 0.69
r 0.31
r 1

Where d is the difference of rank and n is the number of paired observation and also
-1< r < 1.

Question 1
Define econometrics? What is difference between mathematical and econometric
model? Give example.
Econometrics

Literally interrupted econometrics means economic measurement although


measurement is an important part of econometrics, the scope of econometrics is
much broader, as can be seen from the following questions.

Econometrics, the result of a certain outlook on the role of economics, consists


of the application of mathematical statistics to economic data to lend empirical
support to the models constructed by mathematical economics and to obtain
numerical result.

Econometrics is concerned with the empirical determination of economic laws.

Economic theory makes statements your hypothesis that are mostly qualitative
in nature. For example microeconomics theory states that other things
remaining the same, a reduction in the price of a commodity is excepted to
increase the quantity demanded of that commodity.

Econometrics gives empirical content to most economic theory.

Although mathematically statistics provides many tools in the trade, the


econometrician often needs special method in view of the unique nature of most
economic dats.

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