Introductory Econometrics - A Modern Approach - ch04.pptVIP

Economics 20 - Prof. Anderson Assumptions of the Classical Linear Model CLM So far, we know that given the Gauss-Markov assumptions, OLS is BLUE, In order to do classical hypothesis testing, we need to add another assumption beyond the Gauss-Markov assumptions Assume that u is independent of x1, x2,…, xk and u is normally distributed with zero mean and variance s2: u ~ Normal 0,s2 CLM Assumptions cont Under CLM, OLS is not only BLUE, but is the minimum variance unbiased estimator We can summarize the population assumptions of CLM as follows y|x ~ Normal b0 + b1x1 +…+ bkxk, s2 W