Economics and Statistics

  Let X and Y be column vectors and the sample has the size n: The vector beta contains both the coefficient of X as well as the coefficient for the intercept. This is equivalent to writing this equation: We will assume that the expected value of the error term is 0 (this can be done by construction), and that X is uncorrelated to epsilon. Assume the following is for population data. Let's prove that statement: Since we know that the covariance between X and epsilon is 0, it follows that the expected value of X times the error term must also be 0. Since we do not have access to the actual expected value of the distribution, let's use the sample data instead: The hat on the covariance signifies that this is a MM estimator. Let's use the fact that the sample mean of epsilon is also equal to 0, then:   Using the estimation for the covariance and that the expected value of the error term equals 0: Then we have: To get this result, you must use the properties of the summation op...

Hello I'm finally back from my extended break. I thought that we should start studying Econometrics.  Let's begin by analyzing a simple bivariate regression. Assume that this equation describes the relationship between two variables X and Y. We say that Y is the dependent variable, whereas X is the independent variable. In other words, we assume that Y (the output) depends on X (the input). Epsilon is the error term, it represents other factors that affect Y. The error term must be uncorrelated with the variable X so that we do not need to include them in our regression, and thus the coefficient of X (beta) should not change, even though Epsilon also determines Y.  beta-0 is the constant term. It tells us what would be Y if X=0. beta-1 is the effect on Y if X changes by one unit. To see this, assume X=education is a continuous function, let's take the derivative of Y=wage with respect to X: Thus, if education goes up by one unit, we should expect, on average, wage to go up ...