Question

In: Economics

Two of the most important econometric concepts are the "stochastic error term" and the "residual". Define...

Two of the most important econometric concepts are the "stochastic error term" and the "residual". Define both terms by explaining how they are similar and how they are different.

Solutions

Expert Solution

Soln. Stochastic error term - Any mathematical model when not able to establish the complete relationship between dependent and independent variable, is considered to be in stochastic error and the amount at which the model equation differs during empirical analysis is termed as stochastic error term.

Residual - The gap or difference between the observed value and the value predicted by model is termed as residual.

Differences between stochastic error term and residual

1. Stochastic error term is difference between the observed and the true value whereas residual is difference between the observed and the predicted value.

2. Error term is non-observable as it is a theoretical concept, where as, residual is real time value and observable.

3. The sum of residual is always zero, where as, sum of stochastic error term need not be always zero.

    Similarities between stochastic error term and residual

1. Both stochastic error term and residual are used for calculating deviation from observed values in the model

2. Both stochastic error term and residual are used in statistical model as concept of making the model more accurate in predicting the desired results.


Related Solutions

Distinguish between the following Residual term and error term Sample Regression Function and Population Regression Function...
Distinguish between the following Residual term and error term Sample Regression Function and Population Regression Function Variables and parameters Perfect Multicollinearity and less than perfect Multicollinearity. R-squared and Correlation coefficient.[10 Marks] [TOTAL: 30 MARKS]
Chapter #9 deals with Fluid Mechanics. Two of the most important concepts in Fluid Mechanics are...
Chapter #9 deals with Fluid Mechanics. Two of the most important concepts in Fluid Mechanics are Archimedes Principle and Bernoulli's Equation. 1) Give a DETAILED explanation of Archimedes Principle and Bernoulli's Equation 2) Come up with your own experiment/demonstration to show the effect
List and describe two concepts that you feel were most important to you in this course....
List and describe two concepts that you feel were most important to you in this course. Why were these important to you?
Entropy is one of the most important and most fundamental concepts in thermal dynamics. It is...
Entropy is one of the most important and most fundamental concepts in thermal dynamics. It is also one of the most frequently misunderstood. In this assignment, you will research entropy and write a 3-5 page informative essay describing what entropy is and how it relates to the 2nd law of Thermodynamics. Your description of entropy should be more than a simple definition; the purpose of the paper is for you to demonstrate your own understanding of this concept and how...
One of the MOST important concepts to remember when dealing...
One of the MOST important concepts to remember when dealing with a patient who has a stoma is: A: A stoma patient requires very special equipment for emergency ventilations B: You are required to use a pocket mask to ventilate these patients. C: The victim will likely need suctioning prior to ventilations. D: You should use an infant bag-valve-mask device for these patients.
26. a correlated sample t test minimizes a most important type of random error namely that error due to
      26. a correlated sample t test minimizes a most important type of random error namely that error due to a. individual differences b. measurement deficiencies c. equipment breakdowns d. any uncontrolled factors e. instrument unreliabilty 27. Refer to the following parenthetical statement appearing in a published report [x2(3, n = 56) = 11.69, p < 0.01] The p-value of less than 0.01 associated the chi-square test reflects a very a. common event that fails to support the...
The demand for money is one of the most important concepts in the Liquidity Preference Theory...
The demand for money is one of the most important concepts in the Liquidity Preference Theory of Interest. What are the three main components of the demand for money in this idea about how interest rates are determined?
Define the term metaparadigm and discuss its relevance in nursing practice. How are the 4 concepts...
Define the term metaparadigm and discuss its relevance in nursing practice. How are the 4 concepts in the metaparadigm linked? What is the difference between Grand theories and conceptual models, Middle-range theories, and Practice-level theories.
Capital Budgeting and Risk Analysis Define the most important capital budgeting techniques. name at least two...
Capital Budgeting and Risk Analysis Define the most important capital budgeting techniques. name at least two (2) capital budgeting techniques (e.g., NPV, IRR, Payback Period, etc.) that you used to arrive investment decision.
Bonds and corporations are two different concepts, explain how these concepts provided the most value to...
Bonds and corporations are two different concepts, explain how these concepts provided the most value to you. Indicate how these two (2) new areas of knowledge will benefit you in your job or future career.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT