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Part 1. Regression Analysis on Cross Sectional Data Chap 2. The Simple Regression Model—Practice for learning multiple Regression Bivariate linear regression model : the slope parameter in the relationship between y and x holding the other factors in u fixed. : the intercept parameter. u: the error term or disturbance factors other than x that affect y, unobserved More Discussion :A one-unit change in x has the same effect on y, regardless of the initial value of x. Can we draw ceteris paribus conclusions about how x affects y from a random sample of data, when we are ignoring all the other factors? --generally speaking, we can not! Classical Regression Assumptions Feasible assumption if the intercept term is included Linearly uncorrelated zero conditional mean assumption Then Sample----Population Attention: u: error term 误差项 : the fitted value : residuals 残差项 What is OLS ?(Minimize the sum of sq residuals) OLS Total Sum of Squares (SST) =Explained Sum of Squares + Residual Sum of Squares Coefficient of determination the fraction of the sample variation in y that is explained by x. Is R-squared important? Units of Measurement If one of the dependent variables is multiplied by the constant c—which means each value in the sample is multiplied by c—then the OLS intercept and slope estimates are also multiplied by c. If one of the independent variables is divided or multiplied by some nonzero constant, c, then its OLS slope coefficient is multiplied or divided by c, respectively. How to judge the size of the coefficient? The goodness-of-fit of the model, R-sq, should not depend on the units of measurement of our variables. Function Form Linear Nonlinear When and Why to take logarithm? When? (For $, GDP, Output, salary…) Why? Make the variable normal looking. (income) Why? Minimize heteroskedasticity. Why? Elasticity Bi-Logarith