business studies class. Merger of economics and statistics

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business studies class. Merger of economics and statistics

© All Rights Reserved

- Econometrics Project
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- EC422_outline_2014_15
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- endogeneity test stata 14.pdf
- Using Weights in Stata(1)
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- dp1309
- Mendenhall_ch06-+modified.ppt

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the same variables is based on related objects. It violates the assumption of instance

independence, which underlies most of the conventional models. It generally exists in those

types of data-sets in which the data, instead of being randomly selected, is from the same

source.

Presence

The presence of autocorrelation is generally unexpected by the researcher. It occurs mostly

due to dependencies within the data. Its presence is a strong motivation for those

researchers who are interested in relational learning and inference.

Examples

In order to understand autocorrelation, we can discuss some instances that are based upon

cross sectional and time series data. In cross sectional data, if the change in the income of

a person A affects the savings of person B (a person other than person A), then

autocorrelation is present. In the case of time series data, if the observations show intercorrelation, specifically in those cases where the time intervals are small, then these intercorrelations are given the term of autocorrelation.

In time series data, autocorrelation is defined as the delayed correlation of a given series.

Autocorrelation is a delayed correlation by itself, and is delayed by some specific number of

time units. On the other hand, serial autocorrelation is that type which defines the lag

correlation between the two series in time series data.

Homoscedasticity

central to linear regression models. Homoscedasticity describes a

situation in which the error term (that is, the noise or random

disturbance in the relationship between the independent variables

and the dependent variable) is the same across all values of the

independent variables. Heteroscedasticity (the violation of

homoscedasticity) is present when the size of the error term diff ers

across values of an independent variable. The impact of violating

the assumption of homoscedasticity is a matter of degree, increasing

as heteroscedasticity increases.

A simple bivariate example can help to illustrate heteroscedasticity:

Imagine we have data on family income and spending on luxury

items. Using bivariate regression, we use family income to predict

luxury spending (as expected, there is a strong, positive association

detect a problem the residuals are very small for low values of

family income (families with low incomes dont spend much on

luxury items) while there is great variation in the size of the

residuals for wealthier families (some families spend a great deal on

luxury items while some are more moderate in their luxury

spending). This situation represents heteroscedasticity because the

size of the error varies across values of the independent variable.

Examining the scatterplot of the residuals against the predicted

values of the dependent variable would show the classic coneshaped pattern of heteroscedasticity.

The problem that heteroscedasticity presents for regression models

is simple. Recall that ordinary least-squares (OLS) regression seeks

to minimize residuals and in turn produce the smallest possible

standard errors. By defi nition OLS regression gives equal weight to

all observations, but when heteroscedasticity is present the cases

with larger disturbances have more pull than other observations.

The coeffi cients from OLS regression where heteroscedasticity is

present are therefore ineffi cient but remain unbiased. In this case,

weighted least squares regression would be more appropriate, as it

downweights those observations with larger disturbances.

A more serious problem associated with heteroscedasticity is the

fact that the standard errors are biased. Because the standard error

is central to conducting signifi cance tests and calculating confi dence

intervals, biased standard errors lead to incorrect conclusions about

programs provide an option of robust standard error to correct this

bias; weighted least squares regression also addresses this concern

but requires a number of additional assumptions. Another approach

for dealing with heteroscedasticity is to transform the dependent

variable using one of the variance stabilizing transformations. A

logarithmic transformation can be applied to highly skewed

variables, while count variables can be transformed using a square

root transformation. Overall, the violation of the homoscedasticity

assumption must be quite severe in order to present a major

problem given the robust nature of OLS regression.

Heteroscedasticity

that the error term should be homogeneous in nature. Whenever that

assumption is violated, then one can assume that heteroscedasticity has

occurred in the data.

Statistics Solutions is the country's leader in examining heteroscedasticity

and dissertation statistics help. Contact Statistics Solutions today for a free

30-minute consultation.

An example can help better explain Heteroscedasticity.

Consider an income saving model in which the income of a person is

regarded as the independent variable, and the savings made by that

individual is regarded as the dependent variable for heteroscedasticity. So,

as the value of the income of that individual increases, simultaneously the

savings also increase. But in the presence of heteroscedasticity, the graph

would depict something unusual for example there would be an increase in

the income of the individual but the savings of the individual would remain

constant.

This example also signifies the major difference between heteroscedasticity

and homoscedasticity. Heteroscedasticity is mainly due to the presence of

outlier in the data. Outlier in Heteroscedasticity means that the observations

that are either small or large with respect to the other observations are

present in the sample.

Heteroscedasticity is also caused due to omission of variables from the

model. Considering the same income saving model, if the variable income is

deleted from the model, then the researcher would not be able to interpret

anything from the model.

Heteroscedasticity is more common in cross sectional types of data than in

time series types of data. If the process of ordinary least squares (OLS) is

performed by taking into account heteroscedasticity explicitly, then it would

be difficult for the researcher to establish the process of the confidence

intervals and the tests of hypotheses. Due to the presence of

heteroscedasticity, the variance that is obtained by the researcher should be

of lesser value than the value of the variance of the best linear unbiased

estimator (BLUE). Therefore, the results obtained by the researcher through

significant tests would be inaccurate because of the presence of

heteroscedasticity.

Multicollinearity

Multicollinearity is a state of very high intercorrelations or inter-associations

among the independent variables. It is therefore a type of disturbance in the

data, and if present in the data the statistical inferences made about the data

may not be reliable.

There are certain reasons why multicollinearity occurs:

It is caused by an inaccurate use of dummy variables.

It is caused by the inclusion of a variable which is computed from other

Multicollinearity can also result from the repetition of the same kind of

variable.

Generally occurs when the variables are highly correlated to each other.

follows:

The partial regression coefficient due to multicollinearity may not be

Multicollinearity results in a change in the signs as well as in the

another sample.

Multicollinearity makes it tedious to assess the relative importance of the

dependent variable.

In the presence of high multicollinearity, the confidence intervals of the

coefficients tend to become very wide and the statistics tend to be very small. It

becomes difficult to reject the null hypothesis of any study when

multicollinearity is present in the data under study.

Goodness-Of-Fit

DEFINITION of 'Goodness-Of-Fit'

Used in statistics and statistical modelling to compare an anticipated frequency to

an actual frequency. Goodness-of-fit tests are often used in business decision

making. In order to calculate a chi-square goodness-of-fit, it is necessary to first

state the null hypothesis and the alternative hypothesis, choose a significance

level (such as = 0.5) and determine the critical value.

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Sum of Squares

DEFINITION of 'Sum of Squares'

A statistical technique used in regression analysis. The sum of squares is a

mathematical approach to determining the dispersion of data points. In a

regression analysis, the goal is to determine how well a data series can be fitted

to a function which might help to explain how the data series was generated. The

sum of squares is used as a mathematical way to find the function which best fits

(varies least) from the data.

In order to determine the sum of squares the distance between each data point

and the line of best fit is squared and then all of the squares are summed up. The

line of best fit will minimize this value.

Next Up

1.

2.

3.

4.

HEDONIC REGRESSION

LINE OF BEST FIT

NONLINEARITY

5.

There are two methods of regression analysis which use the sum of squares: the

linear least squares method and the non-linear least squares method. Least

squares refers to the fact that the regression function minimizes the sum of the

squares of the variance from the actual data points. In this way, it is possible to

draw a function which statistically provides the best fit for the data. A regression

function can either be linear (a straight line) or non-linear (a curving line).

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Least Squares

DEFINITION of 'Least Squares'

A statistical method used to determine a line of best fit by minimizing the sum of

squares created by a mathematical function. A "square" is determined by

squaring the distance between a data point and the regression line. The least

squares approach limits the distance between a function and the data points that

regression modeling in which a curve is fit into a set of data.

Next Up

1.

2.

3.

4.

SUM OF SQUARES

LEAST SQUARES METHOD

LINE OF BEST FIT

HEDONIC REGRESSION

5.

The least squares approach is a popular method for determining regression

equations. Instead of trying to solve an equation exactly, mathematicians use the

least squares to make a close approximation (referred to as a maximumlikelihood estimate). Modeling methods that are often used when fitting a function

to a curve include the straight line method, polynomial method, logarithmic

method and Gaussian method.

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