Econometrics - The simple regression model - Multiple regression

4 important questions on Econometrics - The simple regression model - Multiple regression

How to interpret the homoskedasticity assumption?

The value of the explanatory variables does not contain any information about the variance of the unobserved factors.

What is omitted variable bias?

The error term u contains a variable that is also correlated with x1 example:

score = b0 + b1*class size + u

corr(u,funding) =/= 0
crr(funding, class size) =/= 0
because of that
corr(u,class size) =/= 0

When can you omit a variable? so not commit omitted variable bias?

  1. corr(x2,y)=0
  2. corr(x1,x2)=0
  • Higher grades + faster learning
  • Never study anything twice
  • 100% sure, 100% understanding
Discover Study Smart

5 steps for a succesful model

  1. Thorough literature search, understand the causal mechanisms
  2. See which variables appear correlated with dependent variable of interest
  3. Limit attention to one or two most significant predictor variables
  4. Determine whether to ignore or include variables
  5. Validate results

The question on the page originate from the summary of the following study material:

  • A unique study and practice tool
  • Never study anything twice again
  • Get the grades you hope for
  • 100% sure, 100% understanding
Remember faster, study better. Scientifically proven.
Trustpilot Logo