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Lecture 8+9 Multicollinearity and Heteroskedasticity Exercise 10.2

This document contains exercises related to multicollinearity and heteroskedasticity. It includes: 1) An exercise asking to fit a regression model to hypothetical data and determine if the parameters can be estimated due to perfect multicollinearity between the independent variables. 2) An exercise involving two regressions using economic data, asking questions about multicollinearity between variables, significance of coefficients, and the justification of functional forms. 3) Additional exercises involving assessing multicollinearity in models, interpreting regressions in different functional forms, comparing R-squared values, and justifying transformations to address heteroskedasticity.

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86 views3 pages

Lecture 8+9 Multicollinearity and Heteroskedasticity Exercise 10.2

This document contains exercises related to multicollinearity and heteroskedasticity. It includes: 1) An exercise asking to fit a regression model to hypothetical data and determine if the parameters can be estimated due to perfect multicollinearity between the independent variables. 2) An exercise involving two regressions using economic data, asking questions about multicollinearity between variables, significance of coefficients, and the justification of functional forms. 3) Additional exercises involving assessing multicollinearity in models, interpreting regressions in different functional forms, comparing R-squared values, and justifying transformations to address heteroskedasticity.

Uploaded by

Amelia Tran
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Lecture 8+9

MULTICOLLINEARITY AND HETEROSKEDASTICITY


Exercise 10.2.
Consider the set of hypothetical data in Table:
Y -10 -8 -6 -4 -2 0 2 4 6 8 10
X2 1 2 3 4 5 6 7 8 9 10 11
X3 1 3 5 7 9 11 13 15 17 19 21
Suppose you want to fit the model to the data.
Y i=β 1 + β 2 X 2i + β 3 X 3 i +ui

a. Can you estimate the three unknowns? Why or why not? Y không tăng tuyến tính theo X2
và X3
b . If not, what linear functions of these parameters, the estimable functions, can you
estimate? Show the necessary calculations.
Exercise 10.24.
From the annual data for the U.S. manufacturing sector for 1899−1922 , Dougherty obtained
the following regression results: †
^
log ⁡Y ¿ 2.81−0.53 log ⁡K +¿ 0.91 log ⁡L+0.047 t (0.021)¿ R2=0.97 ¿ F=189.8 ¿
 se =(1.38) (0.34) ¿

where Y =¿ index of real output, K=¿ index of real capital input, L=¿ index of real labor
input, t=¿ time or trend.
Using the same data, he also obtained the following regression:
^
log ⁡( Y /L)=−0.11+ 0.11 log ⁡(K / L)+ 0.006 t se ¿( 0.03)( 0.15)( 0.006)
2
R =0.65 F=19.5

a. Is there multicollinearity in regression (1)? How do you know?


b . In regression (1), what is the a priori sign of log ⁡K ? Do the results conform to this
expectation? Why or why not?
c. How would you justify the functional form of regression (1)? (Hint: CobbDouglas
production function.)
d . Interpret regression (1). What is the role of the trend variable in this regression?
e . What is the logic behind estimating regression (2)?
f . If there was multicollinearity in regression (1), has that been reduced by regression (2)?
How do you know?
g. If regression (2) is a restricted version of regression (1), what restriction is imposed by
the author? (Hint: returns to scale.) How do you know if this restriction is valid? Which test
do you use? Show all your calculations.
h . Are the R2 values of the two regressions comparable? Why or why not? How would you
make them comparable, if they are not comparable in the present form?
Exercise 10.27.
Table 10.13 gives data on imports, GDP, and the Consumer Price Index (CPI) for the United
States over the period 1975-2005. You are asked to consider the following model:
ln Imports t =β 1+ β 2 ln ⁡GDPt + β3 ln ⁡CPI t + ut
a . Estimate the parameters of this model using the data given in the table.
b . Do you suspect that there is multicollinearity in the data?
c. Regress: (1) ln Imports t =A 1 + A2 ln ⁡GDPt
(2) ln Imports t =B 1+ B2 ln ⁡CPI t
(3) ln ⁡GDP t=C 1+ C2 ln ⁡CPI t
On the basis of these regressions, what can you say about the nature of multicollinearity in
the data?
d. Suppose there is multicollinearity in the data but β́ 2 and β́ 3 are individually significant at
the 5 percent level and the overall F test is also significant. In this case should we worry
about the collinearity problem?
Exercise 11.2.
In a regression of average wages (W , $ ) on the number of employees ( N ) for a random
sample of 30 firms, the following regression results were obtained:
^
W ¿ 7.5+0.009 N
2
t ¿  n . a .  (16.10) R =0.90
^
W /N ¿ 0.008+7.8 (1/ N )
2
t ¿(14.43)(76.58) R =0.99

a. How do you interpret the two regressions?


b . What is the author assuming in going from Eq. (1) to Eq. (2)? Was he worried about
heteroscedasticity? How do you know?
c. Can you relate the slopes and intercepts of the two models?
d. Can you compare the R2 values of the two models? Why or why not?
Exercise 11.6.
For pedagogic purposes Hanushek and Jackson estimate the following model:
C t=β 1 + β 2 GNP t + β 3 Dt +ui

where C t=¿ aggregate private consumption expenditure in year t ,GNPt =¿ gross national
product in year t , and D=¿ national defense expenditures in year t , the objective of the
analysis being to study the effect of defense expenditures on other expenditures in the
economy.
2 2 2
Postulating that σ t =σ ( GNPt ) , they transform (1) and estimate
C t /GNPt =β 1 ( 1 /GNP t ) + β 2 + β 3 ( Dt /GNPt ) +u t /GNPt
The empirical results based on the data for 1946-1975 were as follows (standard errors in
the parentheses): ¿
Ć t=26.19+ 0.6248GNP t−0.4398 D t ( 2.73 ) ( 0.0060 ) (0.0736) R2=0.999
^
C t /GNP t=25.92 ( 1/GNPt ) +0.6246−0.4315 ( Dt /GNPt ) (2.22) (0.0068)
( 0.0597 ) R2=0.875a. What assumption is made by the authors about the nature of
heteroscedasticity? Can you justify it?
b. Compare the results of the two regressions. Has the transformation of the original model
improved the results, that is, reduced the estimated standard errors? Why or why not?
c. Can you compare the two R2 values? Why or why not? (Hint: Examine the dependent
variables.)

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