# L2R12 - Multiple Regression

 The flashcards below were created by user Anonymous on FreezingBlue Flashcards. Model Misspecifications 1- The functional form can be misspecified- Important variables can be omitted.- variable should be transformed.- data is improperly pooled.2- Explanatory variables are correlated with the error term in time series models.- a lagged dependent variable is used an an independent variable.- a function of the dependent variable is used as an independent variable.- independent variable are measured with error.3- Other time-series misspecifications that result in non-stationary. Effects of Model Misspecification - baised or inconsistent regression coefficients- unreliable hypothesis testing and inaccurate predictions Qualitative Independent Variables (Dummy Variables) Idea: calculate Prob. (Independent variable = 1)- capture the effect of a binary independent variables- use one less dummy variable than the number of categories- required methods other than ordianry least squares (e.g. probit, logit (using max. likelihood), or discriminant analysis (using a linear function similar to ordinary least squares)) Conditional Heteroskedasticity What is it? Residual variance related to the level of independent variableWhat it does? Too many Type I errorsHow to detect? Breusch-Pagan Chi Square Test BP = n x R2residHow to Fix: Used White-corrected (robust) standard errors Serial Correlation Can be positive or negative (+ive S.C. is more common) What is it? Residuals are correlatedWhat it does? Too many Type I errors (too many type II errors for -ive S.C.)How to detect? Durbin Watson Test = 2(1-r)How to Fix: Use Hansen method to adjust standard errors If C.H. and +ive S.C. are present together, use Hansen method to adjust standard errors Multicollinearity What is it? Two or more independent variables are correlatedWhat it does? Too many Type II errorsHow to detect? t-Test implies insignificance of individual variables but F-Test implies significanceHow to Fix: remove one of the correlated variables AuthorAnonymous ID18252 Card SetL2R12 - Multiple Regression DescriptionDescriptive Questions Updated2010-05-07T23:16:05Z Show Answers