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    Arsheen 100929

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    Muhammad Sahil
    This document discusses the classical linear regression model and its assumptions. It defines econometrics as combining economics, mathematics, and statistics. It then outlines the classical linear regression model as Yi = β1 + β2Xi + ui and lists 10 key assumptions: 1) the model is linear in parameters, 2) X values are fixed, 3) the disturbance term has a zero mean, 4) the disturbance term has constant variance, 5) no autocorrelation between disturbances, 6) more observations than parameters, 7) variability in X values, 8) no specification bias, 9) zero covariance between the disturbance term and X values, and 10) no perfect multicollinearity.

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    Arsheen 100929

    Uploaded by

    Muhammad Sahil
    26 views14 pages
    This document discusses the classical linear regression model and its assumptions. It defines econometrics as combining economics, mathematics, and statistics. It then outlines the classical linear regression model as Yi = β1 + β2Xi + ui and lists 10 key assumptions: 1) the model is linear in parameters, 2) X values are fixed, 3) the disturbance term has a zero mean, 4) the disturbance term has constant variance, 5) no autocorrelation between disturbances, 6) more observations than parameters, 7) variability in X values, 8) no specification bias, 9) zero covariance between the disturbance term and X values, and 10) no perfect multicollinearity.

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    This document discusses the classical linear regression model and its assumptions. It defines econometrics as combining economics, mathematics, and statistics. It then outlines the classical linear regression model as Yi = β1 + β2Xi + ui and lists 10 key assumptions: 1) the model is linear in parameters, 2) X values are fixed, 3) the disturbance term has a zero mean, 4) the disturbance term has constant variance, 5) no autocorrelation between disturbances, 6) more observations than parameters, 7) variability in X values, 8) no specification bias, 9) zero covariance between the disturbance term and X values, and 10) no perfect multicollinearity.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    26 views14 pages

    Arsheen 100929

    Uploaded by

    Muhammad Sahil
    This document discusses the classical linear regression model and its assumptions. It defines econometrics as combining economics, mathematics, and statistics. It then outlines the classical linear regression model as Yi = β1 + β2Xi + ui and lists 10 key assumptions: 1) the model is linear in parameters, 2) X values are fixed, 3) the disturbance term has a zero mean, 4) the disturbance term has constant variance, 5) no autocorrelation between disturbances, 6) more observations than parameters, 7) variability in X values, 8) no specification bias, 9) zero covariance between the disturbance term and X values, and 10) no perfect multicollinearity.

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    © All Rights Reserved
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    Download as pptx, pdf, or txt
    of 14

    ISLAMIA COLLEGE OF SCIENCE

    & COMMERCE SRINAGAR


    NAME: Owais Ahmad Malik

    CLASS: Economics (4th Sem)

    ROLL NO. : 21870024

    SUBJECT : Econometrics

    TOPIC : Classical Linear Regression Model & Its Assumptions

    INCHARGE : Dr. Umer


    ECONOMETRICS

    The term ‘Econometrics’ was coined


    by “Ragnar Frisch”, and he was one
    of the founder of the Econometric
    Society.
    It deals with the measurement of
    economic relationships.
    “According to Koutsoyiannis, Econometrics is a
    Social Science that is a combination of
    Economic theory , Mathematics and
    Statistics for the purpose of providing
    numerical values, for the parameters of
    economic relationships and thereby
    verifying economic theories.”
    CLASSICAL LINEAR REGRESSION MODEL
     In Regression analysis , our objective is not only to obtain b1^ andb2^
    but also to draw inferences about the true b1 and b2. For this we must
    not only specify the functional form of the model, but also make
    certain assumptions about the manner in which Yi are generated .
    The PRF: Yi = β1 + β2 Xi + ui
    It shows that Yi depends on both Xi and ui
    Therefore , unless we specific about how Xi an ui are generated,
    there is no way we can make any statistical inferences about the true Yi
    and even β1 & β2 .
    Thus , the Assumptions made about the Xi variable and the error term are
    extremely critical to the valid interpretation of the Regression estimates.
    THIS GAUSSIAN , STANDARD , OR CLASSICAL
    LINEAR REGRESSION MODEL (CLRM) WHICH IS
    THE CORNERSTONE OF THE MOST
    ECONOMETRIC THEORIES
    Assumptions of CLRM
    ASSUMPTION 1
     Linear egression Model : The regression model is
    linear in parameters, where the regressand (y) and
    regressor(x) themselves may be linear or non
    linear .That is the regression model as shown in
    equation:
     Yi = β1 + β2 Xi + ui
    ASSUMPTION 2

     X values are fixed in repeated sampling :Values taken by the


    regressor X are considered fixed in repeated samples .
    Technically , X is assumed as non-stochastic that is fixed.

    ASSUMPTION 3

     Zero Mean Value of Disturbance ui: Given the value of Xi, the
    mean, or expected, value of the random disturbance term ui is
    zero. Symbolically, we have E(ui/ Xi) =0.
    ASSUMPTION 4

    Homoscedasticity or Constant Variance or equal variance of ui:


    Given the value of x,the variance of ui is the
    same for all observations.
    ASSUMPTION 5
     No Autocorrelation between the Disturbances:
    Given any two X values, Xi and Xj(i j), the correlation
    between any two ui and uj(I is not equal to j) is zero.
     Cov (ui,uj/xi)=0
    ASSUMPTION 6

     The Number of Observations n Must Be Greater than


    the Number of Parameters to Be Estimated:
    Alternatively, the number of observations must be
    greater than the number of explanatory variables.
    Since from this single observation there is no way to
    estimate the two unknowns, β1 and β2.
    ASSUMPTION 7

     Variability in X values: The X values in a given


    sample must not all be the same. Technically,
    var (X) must be a positive finite number.
    ASSUMPTION 8

     No specification bias: the regression model is


    correctly specified. Leaving out important
    explanatory variables, including unnecessary
    variables, or choosing the wrong functional
    form of the relationship between the Y and X
    variables are some examples of specification
    error.
    ASSUMPTION 9
     Zero covariance between ui and Xi: The disturbance term u
    and the explanatory variable(s) X are
    uncorrelated .otherwise if Xi an ui are correlated it is not
    possible to access there individual effects on y. If x and u
    are positively correlated than when x increases u also
    increases and vice versa. So it is always difficult to isolate
    the influences of x and u on Y.
    ASSUMPTION 10

     There is no perfect multicolinearity : That


    is there is no perfect linear relationship
    among the explanatory variables.
    ( this assumption is valid in Multiple
    regression model).

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