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Econometrics For Dummies Cheat Sheet
Econometrics For Dummies Cheat Sheet
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The model has no heteroskedasticity (meaning the variance of the error is the
same regardless of the independent variable's value).
The model has no autocorrelation (the error term doesn't exhibit a systematic
relationship over time).
If one (or more) of the CLRM assumptions isn't met (which
econometricians call failing), then OLS may not be the best estimation
technique. Fortunately, econometric tools allow you to modify the OLS
technique or use a completely different estimation method if the CLRM
assumptions don't hold.
Definition
Consequences
Detection
Solution
High
multicollinearity
Two or
more
independent
variables in
a
regression
model
exhibit a
close linear
relationship.
Large standard
errors and
insignificant tstatistics
Coefficient
estimates
sensitive to
minor changes
in model
specification
Nonsensical
coefficient signs
and magnitudes
Pairwise
correlation
coefficients
Variance
inflation
factor (VIF)
1. Collect
additional
data.
2. Re-specify
the model.
3. Drop
redundant
variables.
Heteroskedasticity
The
variance of
the error
term
changes in
response to
a change in
the value of
the
independent
Inefficient
coefficient
estimates
Biased standard
errors
Unreliable
hypothesis tests
Park test
GoldfeldQuandt test
BreuschPagan test
White test
1. Weighted
least squares
(WLS)
2. Robust
standard
errors
variables.
Autocorrelation
An
identifiable
relationship
(positive or
negative)
exists
between the
values of the
error in one
period and
the values of
the error in
another
period.
Dummies Recommends
Inefficient
coefficient
estimates
Biased standard
errors
Unreliable
hypothesis tests
Geary or
runs test
DurbinWatson
test
BreuschGodfrey
test
1. CochraneOrcutt
transformation
2. PraisWinsten
transformation
3. NeweyWest robust
standard
errors
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