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Cheat Sheet Econometrics

This cheat sheet provides summaries of key concepts for simple and multiple linear regression, time series analysis, panel data analysis, and instrumental variables. It defines linear regression models, assumptions, estimates, test statistics, and predictions. For time series, it defines AR(1), random walk, and lagged effects models. It also summarizes fixed effects models for panel data and the linear probability model. The document concludes with an explanation of using proxy and instrumental variables.

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1K views

Cheat Sheet Econometrics

This cheat sheet provides summaries of key concepts for simple and multiple linear regression, time series analysis, panel data analysis, and instrumental variables. It defines linear regression models, assumptions, estimates, test statistics, and predictions. For time series, it defines AR(1), random walk, and lagged effects models. It also summarizes fixed effects models for panel data and the linear probability model. The document concludes with an explanation of using proxy and instrumental variables.

Uploaded by

pat
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Cheat Sheet for Final Exam

Simple linear regression (SLR): ^ 1 =

sxy
s2x

= rxy ssxy , ^ 0 = y

^ 1x

Simple linear regression (SLR) with intercept only: ^ 0 = y


Multiple linear regression (MLR):
Assumptions:
MLR.1: y = 0 + 1 x1 +
+ k xk + u (population model)
MLR.2: Random sample f(yi ; xi1 ; : : : ; xik )gni=1 from the population model
MLR.3: In the sample, none of the independent variables is constant and
there are no exact linear relationships among the independent variables.
MLR.4: E(ujx1 ; : : : ; xk ) = 0 for all x
MLR.5: V ar(ujx1 ; : : : ; xk ) = 2 for all x
MLR.6: ujx N (0; 2 ) (u is normal with constant variance)
For j = 1; : : : ; k:
V ar( ^ j ) =

SSTj (1

Rj2 )

; se( ^ j ) = q

^
SSTj (1

Rj2 )

P
where SSTj = i (xij xj )2 = (n 1)s2xj , Rj2 is the R-squared from the
regression of xj on the other x variables, and ^ 2 = nSSR
.
k 1
Omitted-variables bias: If ~ 1 is the slope estimate from OLS of y on x1 but
the true regression model is y = 0 + 1 x1 + 2 x2 + u, the expected value of
~ 1 is
E( ~ 1 ) = 1 + 2 ~1 ;
where ~1 is the slope from the simple linear regression of x2 on x1 .
R-squared:
SSE
=1
SST

R2 =
where SST =

i (yi

SSR
2
= ry2^;y (or rx;y
in SLR)
SST
P
P
y)2 , SSE = i (^
yi y)2 , SSR = i (yi
1

y^i )2

Test statistics
1. t-statistic (for testing H0 :

= a)
t =

^j

se( ^ j )

(works for robust or non-robust se)


2. 100(1- )% Condence Interval is,
^

se( ^ j )t

=2 (n

1) <

< ^ j + se( ^ j )t

=2 (n

1)

3. F -statistic (ur= unrestricted, r= restricted, q = # of restrictions


in H0 )
2
Rr2 )=q
(Rur
F =
2 )=(n
(1 Rur
k 1)
or
(SSRr SSRur )=q
F =
SSRur =(n k 1)
(only works under nite-sample (normality) assumptions)
Prediction:
In the MLR model in MLR.1, if one were to predict E(yjx0 ) then one would
use
y^ = ^ 0 + ^ 1 x1 +
+ ^ k xk
Considered as an estimate of E(yjx0 ) = 0 + 1 x1 + + k xk the variance of
this prediction is V ( ^ 0 + ^ 1 x1 + + ^ k xk ) = V (^
y ). Considered as an estimate
of y0 = 0 + 1 x1 +
+ k xk + u0 its variance is actually V (^
y ) + V (u0 ) =
2
V (^
y) +
under MLR.5

Time Series
AR(1) model
yt =

1 yt 1

E(ut jyt 1 ; yt 2 ; :::) = 0

+ ut

An AR(1) model is weakly stationary and weakly dependent if j


forecasts from a stationary AR(1) model are of the form,
yn+k =

0 (1

2
1

+ ::: +

k 1
1 )

1j

< 1. The

k
1 yn

and as k grows this gets closer to


0

Random Walk Model


yt =

+ yt

+ ut where E(ut jyt 1 ; yt 2 ; :::) = 0

so that if also V (ut jyt 1 ; yt 2 ; :::) =

E(yt ) = t
V (yt ) = t

0
2

Lagged Eects Model


yt =

1 yt 1

1 zt 1

2 zt 2 :::: p zt p

+ ut

Instant eect of a change of z on y is zero, eect of a one time change in


z felt q < p periods later is q , long run eect of permanent change in z is
1 + 2 :::: + p

Fixed-eects model for panel data


yit =

1 xit1

k xitk

+ ai + uit

uit uncorrelated with x variables, ai allowed to be correlated with x variables


Linear Probability Model
For a binary outcome yi we have,

and,

P (yi
yi
E(ui jx1i ; :::; xki )
V (ui jx1i ; :::; xki )

= 1jx1i ; :::; xki ) = 0 + 1 x1i +


+ k xki
= 0 + 1 x1i +
+ k xki + ui
= 0
= P (yi = 1jx1i ; :::; xki )(1 P (yi = 1jx1i ; :::; xki ))
P (yi = 1jx1i ; :::; xki ) =

xji

Proxy Variable
In the model,
yi =

1 x1i

2 x2i

+ ui

if x2i is not observed but we see a variable zi such that,


E(x2i jx1i ; zi ) = 0 +
E(ui jx1i ; zi ) = 0

1 zi

then we can use zi in place of x2i and estimate the coe cient
yi = (

0 2)

1 x1i

2 1 zi

that is,

+ errori

is a valid regression model.


Instrumental Variables
If we have a violation of ZCM in the model,
yi =

1 xi

+ ui

so that E(ui xi ) 6= 0 but we can nd a variable zi such that,


E(zi ui ) = 0
E(xi jzi ) = 0 +

1 zi

with

6= 0

then zi can be used as an instrument for xi and,


Pn
^
^ 1 = Pni=1 (zi z)(yi y) = 1
z)(xi x)
^1
i=1 (zi

where ^1 is the slope in the regression of y on z and ^ 1 is the slope in the


regression of x on z.
4

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