, ECS3706 Assignment 2 (COMPLETE ANSWERS)
Semester 2 2024 (399706) - DUE September 2024 ;
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1. Explain why econometricians must know and understand the classical
linear regression assumptions. (4)
Econometrics is the branch of economics that applies statistical methods to
economic data in order to give empirical content to economic relationships. The
cornerstone of econometrics is the regression analysis, especially the linear
regression model. Econometricians must understand the classical linear regression
assumptions because these assumptions provide the foundation for the validity of
the model's inferences. When these assumptions hold, the results of a regression
analysis are reliable and can be used to make meaningful predictions or
conclusions. Violating these assumptions can lead to biased, inconsistent, or
inefficient estimates, which undermines the model's utility. Therefore, knowledge
and understanding of these assumptions are essential for any econometrician in
order to ensure accurate modeling and meaningful interpretation.
Here is a detailed explanation of why econometricians must understand each of the
classical linear regression model (CLRM) assumptions:
1. Linear Relationship Between the Dependent and Independent Variables
The first and perhaps most obvious assumption of the classical linear regression
model is that there exists a linear relationship between the dependent variable and
the independent variables. This assumption suggests that changes in the
independent variable(s) are associated with proportional changes in the dependent
variable.
Why It Matters: Understanding this assumption is crucial because linear
regression models are fundamentally based on the idea that there is a straight-line
relationship between the independent variables (predictors) and the dependent
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