Differences between revisions 6 and 19 (spanning 13 versions)

Ordinary Least Squares

Ordinary Least Squares (OLS) is a linear regression method. It minimizes root mean square errors.

Contents

Ordinary Least Squares

Univariate

Given one independent variable and one dependent (outcome) variable, the OLS model is specified as:

It is estimated as:

This model describes (1) the mean observation and (2) the marginal changes to the outcome per unit changes in the independent variable.

The proof can be seen here.

Multivariate

Given k independent variables, the OLS model is specified as:

It is estimated as:

Estimated Coefficients

If these assumptions can be made:

Linearity
Exogeneity
Random sampling
No perfect multicolinearity
Homoskedasticity

Then OLS is the best linear unbiased estimator (BLUE) for regression coefficients.

The variances for each coefficient are:

Note that the standard deviation of the population's parameter is unknown, so it's estimated like:

If the homoskedasticity assumption does not hold, then the estimators for each coefficient are actually:

Wherein, for example, r_1j is the residual from regressing x₁ onto x₂, ... x_k.

The variances for each coefficient can be estimated with the Eicker-White formula:

See Nicolai Kuminoff's video lectures for the derivation of the robust estimators.

CategoryRicottone

Statistics/OrdinaryLeastSquares (last edited 2025-09-03 02:08:40 by DominicRicottone)

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-Deletions are marked like this.
+Additions are marked like this.
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-The regression line passes through two points:
+Given one independent variable and one dependent (outcome) variable, the OLS model is specified as:
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-{{attachment:regression1.svg}}
+{{attachment:model.svg}}
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-and
+It is estimated as:
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-{{attachment:regression2.svg}}
+{{attachment:estimate.svg}}
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-Take the generic equation form of a line:
+This model describes (1) the mean observation and (2) the marginal changes to the outcome per unit changes in the independent variable.
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-{{attachment:b01.svg}}

Insert the first point into this form.

{{attachment:b02.svg}}

This can be trivially rewritten to solve for ''a'' in terms of ''b'':

{{attachment:b03.svg}}

Insert the second point into the original form.

{{attachment:b04.svg}}

Now additionally insert the solution for ''a'' in terms of ''b''.

{{attachment:b05.svg}}

Expand all terms to produce:

{{attachment:b06.svg}}

This can now be eliminated into:

{{attachment:b07.svg}}

Giving a solution for ''b'':

{{attachment:b08.svg}}

This solution is trivially rewritten as:

{{attachment:b09.svg}}

Expand the formula for correlation as:

{{attachment:b10.svg}}

This can now be eliminated into:

{{attachment:b11.svg}}

Finally, ''b'' can be eloquently written as:

{{attachment:b12.svg}}

Giving a generic formula for the regression line:

{{attachment:b13.svg}}
+The proof can be seen [[Econometrics/OrdinaryLeastSquares/UnivariateProof|here]].
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+Line 29:
-== Linear Model ==
+== Multivariate ==
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+Line 31:
-The linear model can be expressed as:
+Given ''k'' independent variables, the OLS model is specified as:
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+Line 33:
-{{attachment:model1.svg}}
+{{attachment:mmodel.svg}}

It is estimated as:

{{attachment:mestimate.svg}}

----



== Estimated Coefficients ==
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+Line 48:
-. Exogeneity
+. [[Econometrics/Exogeneity|Exogeneity]]
 3. Random sampling
 4. No perfect multicolinearity
 5. [[Econometrics/Homoskedasticity|Homoskedasticity]]
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+Line 53:
-{{attachment:model2.svg}}
+Then OLS is the best linear unbiased estimator ('''BLUE''') for regression coefficients.
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+Line 55:
-.#3 Random sampling
 4. No perfect multicolinearity
 5. Heteroskedasticity
+The variances for each coefficient are:
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+Line 57:
-Then OLS is the best linear unbiased estimator ('''BLUE''') for these coefficients.
+{{attachment:homo1.svg}}
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+Line 59:
-Using the computation above, the coefficients are estimated to produce:
+Note that the standard deviation of the population's parameter is unknown, so it's estimated like:
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+Line 61:
-{{attachment:model3.svg}}
+{{attachment:homo2.svg}}
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+Line 63:
-The variance for each coefficient is estimated as:
+If the homoskedasticity assumption does not hold, then the estimators for each coefficient are actually:
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+Line 65:
-{{attachment:model4.svg}}
+{{attachment:hetero1.svg}}
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+Line 67:
-Where R^2^ is calculated as:
+Wherein, for example, ''r,,1j,,'' is the residual from regressing ''x,,1,,'' onto ''x,,2,,'', ... ''x,,k,,''.
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+Line 69:
-{{attachment:model5.svg}}
+The variances for each coefficient can be estimated with the Eicker-White formula:
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+Line 71:
-Note also that the standard deviation of the population's parameter is unknown, so it's estimated like:
+{{attachment:hetero2.svg}}
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+Line 73:
-{{attachment:model6.svg}}
+See [[https://www.youtube.com/@kuminoff|Nicolai Kuminoff's]] video lectures for the derivation of the robust estimators.

Diff for "Statistics/OrdinaryLeastSquares"

Ordinary Least Squares

Univariate

Multivariate

Estimated Coefficients