For each of the Gauss-Markov Theorem assumptions (A0-A3), do the following: (a) State the assumption in...

For each of the Gauss-Markov Theorem assumptions (A0-A3), do the following:

(a) State the assumption in mathematical terms.

(b) State the intuitive meaning of the assumption.

(c) For bonus points, state what might cause the assumption to be violated.

Expert Solution

a) Linearity in parameters.

This means that the dependant variable is a linear function of independent variable and error term.

y = a₀ + a₁ x² is a linear function

If there is non linearity ,it will give rise to incorrect estimates and determinants.

b) For all observations the expected value of the error terms must be zero.

E(€_i) = 0

If the value of the error terms are not zero, the intercept may be biased.

c) Homosedasiticty

It means that the conditional variance of error term is constant for all the dependent variable is same over the time period. The uncertanity of the model is given by the variance of the error term.

V(€_i) = E (€_i) = a constant

If there is difference in the variance of error term there arises the problem of hetrisedasticity

d) No correlation between dependant variable and error term.

Cov (€_i, €_j) = E (€_i, €_j) = 0 , i =|= j

If there is correlation there arises the problem of auto correlation

Rahul Sunny answered 2 years ago

For each of the Gauss-Markov Theorem assumptions (A0-A3), do the following:

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For each of the Gauss-Markov Theorem assumptions (A0-A3), do the following: (a) State the assumption in...

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