Economic data analysis
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... In the context of Linear Multiple Regression model Yt = B1 + B2X2t + B3tX3t + ut Discuss fully the standard assumptions made about the modelThe model Yt = B1 + B2X2t + B3tX3t + ut is based on several simplifying assumptions.
The assumptions about the specification of the model and about the disturbances ut are
Assumption 1. For given X's, the mean value of the disturbance is zero, or
E(ut / X2t,X3t) = 0 for each t
Assumption 2. For given X's, the variance of ut is constant or homoscedastic, or
Var(ut) = sigma2
Assumption 3. For given X's, there is no auto correlation in the disturbances ut, or
Cov(ut1, ut2)=0 t1#t2
E(ut1, ut2)=0 t1#t2
Assumption 4. The stochastic term ut is norma...