Econometrics and Linear Regression Models

Flashcards covering key vocabulary and concepts from an econometrics lecture on linear regression models.

Econometrics

The branch of economics that develops and uses statistical methods for estimating economic relationships.

Typical Goals of Econometrics Analysis

Estimating relationships between random variables, testing hypotheses, and predicting/forecasting random variables.

Steps in Econometrics Analysis

Specifying the regression model, collecting data, and quantifying the model.

βs

Coefficients in the Multiple Regression Model (MRM).

u

The error term in the Multiple Regression Model (MRM).

OLS (Ordinary Least Squared)

A method to estimate the coefficients in a linear regression model.

Correlation

The linear relationship between two variables, and how they change together.

Causation

The cause and effect relationship, where one event is a direct result of another event.

Gauss-Markov Assumption 1

Linearity in parameters.

Gauss-Markov Assumption 2

Random Sampling.

Gauss-Markov Assumption 3

No perfect collinearity and var(x) ≠ 0.

Gauss-Markov Assumption 4

Zero Conditional Mean, E(u|X) = 0. Given any values of X, the errors are on average zero (conditional expectation).

Endogeneity

Condition where Corr(X, u) ≠ 0, violates the Zero Conditional Mean Assumption.

Gauss-Markov Assumption 5

Homoskedasticity (same conditional variance): var(u|X) = σ^2.

Gauss-Markov Assumptions Significance

States that if the Gauss-Markov assumptions are met, OLS estimators are unbiased and there is a formula for variance of OLS estimators.

Assumption 6

The error terms are normally distributed, u ~ N(0, σ^2).

Classical Linear Model (CLM) assumptions

The assumptions 1 through 6 together.

R-squared

Evaluation metric; Sum of Squared Residuals divided by the Sum of Squares Total.

Adjusted R-squared

Evaluation metric; R-squared adjusted for the number of predictors in a model.

MAE

Evaluation metric; Mean Absolute Error

MSE

Evaluation metric; Mean Squared Error

MAPE

Evaluation metric; Mean Absolute Percentage Error

RMSE

Evaluation metric; Root Mean Squared Error