# Topics in Regression Analysis: Heteroskasticity, Omitted Variables, Endogeneity, Instrumental Variab - PowerPoint PPT Presentation

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## Topics in Regression Analysis: Heteroskasticity, Omitted Variables, Endogeneity, Instrumental Variab

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Title: Topics in Regression Analysis: Heteroskasticity, Omitted Variables, Endogeneity, Instrumental Variab

1
Topics in Regression Analysis Heteroskasticity,
Omitted Variables, Endogeneity, Instrumental
Variables, and Errors in Variables
• ECON 222
• Petra Todd

2
Heteroskedasticity
• When the variance is not constant across
observations

3
Variance of ols estimator under heteroskedasticity
4
Heteroskedasticity of known form
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• If form of heteroskedasticity is known, then
reweighting the data increases efficiency
• But, oftentimes not known

7
Omitted Variables
• True model
• Estimated model
• Classic example in earnings model of an omitted
variable ability

8
Examine consequence of omitting Z for estimating ß
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10
Instrumental Variables A Potential Solution to
Endogeneity Problems
• Model

11
Suppose have an instrument
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13
Two stage least squares (2SLS)
• Number of columns of W is greater than number of
columns of X

14
Errors in Variables
• Two forms
• Measurement error in the dependent variable
• Measurement error in the regressors
• Classical vs. nonclassical
• Classical is purely random
• Nonclassical measurement - might be correlated
with the regressors

15
Measurement error in the dependent variable
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Now, consistency (conv in probability)
18
Errors in Variables in the Regressors
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