One reason why the omitted variable leads to biased estimates is that omitting a relevant variable violates assumption 3 of the necessary assumptions of the classical regression model that states that all explanatory variables must be exogenous, i.e.
From this post, we know that omitting a relevant variable from the regression causes the error term and the explanatory variables to be correlated.
Julia presents various ways to carry out linear regressions. One easy way is to use the lm() function of the GLM package. In this post I will present how to use the lm() and run OLS on the following model
The following post provides a recap of the previous posts on the omitted variable bias (Introduction, Explanation, In-depth discussion of the bias, Consequences of the omitted variable bias) and concludes with some general advise. In case you haven’t read the previous posts, you might want to start from the beginning in order to fully understand the issues related to the omitted variable bias.
All in all, the omitted variable bias is a severe problem. Neglecting a relevant variable leads to biased and inconsistent estimates. Hence, as a general advice, when you are working with linear regression models, you should pay close attention to potentially omitted variables. In particular, you should ask yourself the following questions: Continue reading
In this post, we will discuss the consequence of the omitted variable bias in a more elaborate way. Particularly, we will show that omitting a variable form the regression model violates an OLS assumption and discuss what will happen if this assumption is violated.
In the previous two posts on the Omitted Variable Bias (Post 1 and Post 2), we discussed the hypothetical case of finding out what determines the price of a car. In the hypothetical example, we assumed, for simplicity, that the price of a car depends only on the age of a car and its milage. In this post, we discuss the effects of the omitted variable bias on single coefficients. In order to do so, suppose that you want to find out what is the effect of miles on the price a car.
The second part of the series on the Omitted Variable Bias intends to increase the readers understanding of the bias. Let’s continue with the example from the Introduction. Let the dependent variable be the price of a car and the explanatory variables be the car’s millage and the car’s age. In our case, both millage and age are important factors to that determine the price of a car. Continue reading
The omitted variable bias is a common and serious problem in regression analysis. Generally, the problem arises if one does not consider all relevant variables in a regression. In this case, one violates the first assumption of the assumption of the classical linear regression model. In the introductory part of this series of posts on the omitted variable bias, you will learn what is exactly the omitted variable bias. Let’s start with an example, suppose Continue reading