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Chapter 3:
TWO-VARIABLE
REGRESSION MODEL:
The problem of Estimation
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Prof. Himayatullah May 2004
3-1. The method of ordinary
least square (OLS)
Least-square criterion:
Minimizing U^2i = (Yi – Y^i) 2
= (Yi- ^1 - ^2X)2 (3.1.2)
Normal Equation and solving it
for ^1 and ^2 = Least-square
estimators [See (3.1.6)(3.1.7)]
Numerical and statistical
properties of OLS are as follows:
2
Prof. Himayatullah May 2004
3-1. The method of ordinary least
square (OLS)
OLS estimators are expressed solely in terms of
observable quantities. They are point estimators
The sample regression line passes through
sample means of X and Y
The mean value of the estimated Y^ is equal to
the mean value of the actual Y: E(Y) = E(Y^)
The mean value of the residuals U^i is zero:
E(u^i )=0
u^i are uncorrelated with the predicted Y^i and
with Xi : That are u^iY^i = 0; u^iXi = 0
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Prof. Himayatullah May 2004
3-2. The assumptions underlying
the method of least squares
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Prof. Himayatullah May 2004
β̂ 2
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Prof. Himayatullah May 2004
3-5. The coefficient of determination r2:
A measure of “Goodness of fit”
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Prof. Himayatullah May 2004
3-5. The coefficient of determination r2:
A measure of “Goodness of fit”
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Prof. Himayatullah May 2004