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    Introductory Econometrics: Prachi Singh & Partha Bandopadhyay

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    Gaurav Jakhu
    This document is a lecture on introductory econometrics. It discusses the simple regression model and ordinary least squares estimates. It covers the assumptions needed for OLS estimators to be unbiased, such as linearity, random sampling, nonzero variance of the independent variable, zero conditional mean of the error term, and homoskedasticity. It proves that under these assumptions, the OLS estimators for the slope and intercept are unbiased. It also derives the variance of the OLS slope estimator. The lecture concludes by assigning homework on the error variance.

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    Introductory Econometrics: Prachi Singh & Partha Bandopadhyay

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    Gaurav Jakhu
    20 views18 pages
    This document is a lecture on introductory econometrics. It discusses the simple regression model and ordinary least squares estimates. It covers the assumptions needed for OLS estimators to be unbiased, such as linearity, random sampling, nonzero variance of the independent variable, zero conditional mean of the error term, and homoskedasticity. It proves that under these assumptions, the OLS estimators for the slope and intercept are unbiased. It also derives the variance of the OLS slope estimator. The lecture concludes by assigning homework on the error variance.

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    Lecture3

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    This document is a lecture on introductory econometrics. It discusses the simple regression model and ordinary least squares estimates. It covers the assumptions needed for OLS estimators to be unbiased, such as linearity, random sampling, nonzero variance of the independent variable, zero conditional mean of the error term, and homoskedasticity. It proves that under these assumptions, the OLS estimators for the slope and intercept are unbiased. It also derives the variance of the OLS slope estimator. The lecture concludes by assigning homework on the error variance.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    20 views18 pages

    Introductory Econometrics: Prachi Singh & Partha Bandopadhyay

    Uploaded by

    Gaurav Jakhu
    This document is a lecture on introductory econometrics. It discusses the simple regression model and ordinary least squares estimates. It covers the assumptions needed for OLS estimators to be unbiased, such as linearity, random sampling, nonzero variance of the independent variable, zero conditional mean of the error term, and homoskedasticity. It proves that under these assumptions, the OLS estimators for the slope and intercept are unbiased. It also derives the variance of the OLS slope estimator. The lecture concludes by assigning homework on the error variance.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 18

    Introductory Econometrics

    Prachi Singh & Partha Bandopadhyay

    Ashoka University

    January 26, 2021

    Lecture 3 ECO-2400 January 26, 2021 1 / 18


    Introduction

    Topics in Chapter 2

    1 Simple Regression Model (Section 2.1 JW)


    2 Ordinary Least Squares Estimates (Section 2.2 JW)
    3 Properties of OLS (Section 2.3 JW)
    4 Units of Measurement & Functional Form (Section 2.4 JW)
    5 Expected Values & Variances of OLS Estimators (Section 2.5 JW)
    6 Regression Through Origin (Section 2.6 JW)

    Lecture 3 ECO-2400 January 26, 2021 2 / 18


    Introduction

    What do we need to know about an estimator?

    Unbiased: E(estimator) = population parameter


    E (βˆ1 ) = β1

    Efficient: Minimum variance

    We need few assumptions to show that our estimator is unbiased.


    These assumptions are called GAUSS MARKOV assumptions.

    Lecture 3 ECO-2400 January 26, 2021 3 / 18


    Section 2.5

    Assumptions

    1 Linear in parameters with population model being: y = β0 + β1 x + u


    2 Random sample of size. [xi , yi : i = 1, 2....n. We have:
    yi = β0 + β1 xi + ui
    3 Sample variance of the independent variable x is non-zero.
    4 Zero conditional mean: E (u|x ) = 0
    5 The error u has the same variance given any value of the explanatory
    variable: Var (u|x ) = σ 2

    Lecture 3 ECO-2400 January 26, 2021 4 / 18


    Section 2.5

    How to do sample?

    Always remember and try to be as clear as possible about:


    a) The meaning of conditionality.
    This was was used in describing the PRF, deriving estimates from a
    sample etc. So all expressions which use conditionality should be
    absolutely clear to you. Eg: E (u|x )orE (y |x ).

    b) Random Sampling
    How do you collect samples?

    Lecture 3 ECO-2400 January 26, 2021 5 / 18


    Section 2.5

    Describing sampling

    Lecture 3 ECO-2400 January 26, 2021 6 / 18


    Section 2.5

    OLS estimators are unbiased estimators


    Proof:
    Recollect (from Lecture 2) -
    Pn
    i=1 (xi − x )(yi − y)
    βˆ1 = Pn 2
    (1)
    i=1 (xi − x )

    This can also be written as:


    Pn
    (xi − x )yi
    βˆ1 = Pi=1
    n 2
    (2)
    i=1 (xi − x )

    Total Sum of Squares of x (SSTx ) = ni=1 (xi − x )2


    P

    And for a sample we can write yi = β0 + β1 xi + ui


    Hence we get, Pn
    ˆ (xi − x )(β0 + β1 xi + ui )
    β1 = i=1 (3)
    SSTx

    Lecture 3 ECO-2400 January 26, 2021 7 / 18


    Section 2.5

    OLS estimators are unbiased estimators


    Proof Continued:
    Let’s expand the numerator -
    n
    X n
    X n
    X n
    X
    (xi − x )(β0 + β1 xi + ui ) = β0 (xi − x ) + β1 xi (xi − x ) + ui (xi − x )
    i=1 i=1 i=1 i=1
    (4)
    Pn Pn Pn
    =⇒ β0 i=1 (xi − x ) + β1 i=1 xi (xi − x ) + i=1 ui (xi − x )

    Now lets focus on each of these terms:


    Term 1: ni=1 (xi − x ) = 0 ; why?
    P

    Term 2: Recollect or see Appendix A:


    Pn
    − x ) = ni=1 (xi − x )2 = SSTx
    P
    i=1 xi (xiP
    Term 3: ni=1 ui (xi − x )
    Hence equation 4 becomes:
    Pn
    i=1 ui (xi − x)
    βˆ1 = β1 + (5)
    SSTx
    Lecture 3 ECO-2400 January 26, 2021 8 / 18
    Section 2.5

    OLS estimators are unbiased estimators

    Proof Continued:
    Taking expectation of equation 5. Remember everything is conditioned on
    x values even if it is not explicitly stated -
    Pn
    i=1 ui (xi − x)
    E (βˆ1 ) = E (β1 + ) (6)
    SSTx

    =⇒ E (βˆ1 ) = E (β1 ) + SST 1


    E ( ni=1 ui (xi − x ))
    P
    x
    =⇒ E (βˆ1 |x ) = β1 + SST 1
    ( ni=1 (xi − x )E (ui ))
    P
    x
    Now we know,
    E (ui ) = 0 , so we get -
    E (βˆ1 ) = β1

    Lecture 3 ECO-2400 January 26, 2021 9 / 18


    Section 2.5

    OLS estimators are unbiased estimators


    Proof Continued:
    From equation 12 (see lecture 2), we have:

    βˆ0 = y − βˆ1 x (7)

    and we also have: yi = β0 + β1 xi + ui Taking average: y = β0 + β1 x + u


    So we get,
    βˆ0 = β0 + β1 x + u − βˆ1 x (8)
    =⇒ βˆ0 = β0 + x (β1 − βˆ1 ) + u
    Taking expectation on both sides, we get -
    E (βˆ0 ) = E (β0 ) + x E (β1 − βˆ1 ) + E (u)
    The second and third terms are zero. Why??
    So we get -
    E (βˆ0 ) = β0
    HENCE PROVED.
    Lecture 3 ECO-2400 January 26, 2021 10 / 18
    Section 2.5

    Lecture 3 ECO-2400 January 26, 2021 11 / 18


    Section 2.5

    PLEASE TAKE A BREAK AND


    THEN LISTEN TO REST OF THE LECTURE.

    Lecture 3 ECO-2400 January 26, 2021 12 / 18


    Section 2.5

    Variance of OLS estimators

    Assumption 5: Homoskedasticity - The error u has the same variance


    given any value of the explanatory variable.
    Var (u|x ) = σ 2
    =⇒ Var (u|x ) = E (u 2 |x ) − (E (u|x ))2
    =⇒ E (u 2 |x ) = σ 2

    Assumption 5 written for y instead of u:


    PRF: E (y |x ) = β0 + β1 x
    Var (y |x ) = σ 2

    Lecture 3 ECO-2400 January 26, 2021 13 / 18


    Section 2.5

    Visualizing Homoskedasticity

    Lecture 3 ECO-2400 January 26, 2021 14 / 18


    Section 2.5

    Visualizing Heteroskedasticity

    Lecture 3 ECO-2400 January 26, 2021 15 / 18


    Section 2.5

    Proof for Variance of β1

    Pn
    i=1 ui (xi − x)
    βˆ1 = β1 + (9)
    SSTx
    Var (βˆ1 ) = Var (β1 ) + 1
    Var [ ni=1 ui (xi − x )]
    P
    SSTx2
    =⇒ Var (βˆ1 ) = 0 + 1
    Var [ ni=1 ui (xi − x )]
    P
    SSTx2
    =⇒ Var (βˆ1 ) = 0 + 1 Pn
    SSTx2
    2
    i=1 (xi − x ) [Var (ui )]
    Since Var (ui ) = σ 2 for all i, so we get -
    σ2
    Var (βˆ1 ) = SST 2 [SSTx ]
    x
    2
    Var (βˆ1 ) = σSSTx

    DS: Cover Var for βˆ0 .

    Lecture 3 ECO-2400 January 26, 2021 16 / 18


    Section 2.5

    Homework:
    Read page 55 and 56 (related to error variance).

    Lecture 3 ECO-2400 January 26, 2021 17 / 18


    Section 2.5

    Lecture 3 ECO-2400 January 26, 2021 18 / 18

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