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 Omitted Variable Bias: Understanding the Bias

# Tag Archives: OLS

# Omitted Variable Bias: Introduction

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 Omitted Variable Bias: Introduction

# Assumptions of Classical Linear Regression Models (CLRM)

The following post will give a short introduction about the underlying assumptions of the classical linear regression model (OLS assumptions), which we derived in the following post. Given the Gauss-Markov Theorem we know that the least squares estimator and are unbiased and have minimum variance among all unbiased linear estimators. The Gauss-Markov Theorem is telling us that in a regression model, where the expected value of our error terms is zero, and variance of the error terms is constant and finite and and are uncorrelated for all and the least squares estimator and are unbiased and have minimum variance among all unbiased linear estimators. (A detailed proof of the Gauss-Markov Theorem can be found here)

Continue reading Assumptions of Classical Linear Regression Models (CLRM)# The Gauss Markov Theorem

When studying the classical linear regression model, one necessarily comes across the Gauss-Markov Theorem. The Gauss-Markov Theorem is a central theorem for linear regression models. It states different conditions that, when met, ensure that your estimator has the lowest variance among all unbiased estimators. More formally, Continue reading The Gauss Markov Theorem

# Derivation of the Least Squares Estimator for Beta in Matrix Notation

The following post is going to derive the least squares estimator for , which we will denote as . In general start by mathematically formalizing relationships we think are present in the real world and write it down in a formula.

Continue reading Derivation of the Least Squares Estimator for Beta in Matrix Notation