Essay
ECS4863 ASSIGNMENT 3 SOLUTIONS (SEMESTER 2) 2024( FROM PRESCRIBED BOOK MATERIALS) //wa.me/
- Course
- Institution
ECS4863 ASSIGNMENT 3 SOLUTIONS (SEMESTER 2) 2024( FROM PRESCRIBED BOOK MATERIALS) //
[Show more]
1 review
By: ashmil14 • 2 months ago
Seller
Follow
ruvarashebango
Reviews received
Content preview
ECS4863 ASSIGNMENT 3 ANSWERS OF SEMESTER 2 OF 2024, Question 1. (11 marks)
a) The reasons for preferring random effects over the pooled Ordinary least squares method.
i. It accounts for individual heterogeneity. The random effects model considers the
unobserved heterogeneity across entities (such as individuals, countries and firms) by
allowing for entity-specific random intercepts. This is crucial when the data consists
of multiple observations per entity, as it acknowledges that each entity may have
unique characteristics that affect the dependent variable.
ii. It's more efficient. Random effects estimators are generally more efficient than pooled
OLS estimators because they use both within-entity and between-entity variations.
This combined approach leads to more precise coefficient estimates.
iii. It allows for time-invariant variables. Unlike fixed effects, random effects can
estimate the effects of time-invariant variables, which pooled OLS might not handle
effectively in panel data.
b) How to choose between the Random effects and pooled Ordinary least squares approaches.
State the weakness of the test you will use.
To choose between Random effects and pooled OLS, we use the Breusch-Pagan Lagrange
Multiplier (LM) test. We follow the following process in choosing.
i. Perform the Breusch-Pagan LM test. ii. Set up the null hypothesis that there are no
random effects (that is., pooled OLS is appropriate).
iii. If the test statistic is significant (p-value < significance level), reject the null
hypothesis and prefer random effects.
iv. If the test statistic is not significant, fail to reject the null hypothesis and use pooled
OLS.
Weakness of the test
A key weakness of the Breusch-Pagan LM test is its reliance on the assumption that the
individual-specific effects are uncorrelated with the explanatory variables. If this assumption
is violated, the test may provide misleading results, and the random effects model might not
be appropriate.
c) What are the implications of not considering the correlation structure in panel data and
how is the situation remedied? (2 marks)
Implications
Ignoring the correlation structure in panel data can lead to biased and inefficient estimates.
Specifically, the pooled OLS model assumes that observations are independently and
identically distributed, which is often violated in panel data due to repeated measurements on
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller ruvarashebango. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $7.79. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
79271 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now