WILLIAM CHAU z3376203

ECON2206

TUESDAY 4-5 GOLDSTEIN G02 JASON YU

ECON2206 ASSIGNMENT 2 a) So long as the measurement error remains independent of the x variables in the model then the zero conditional mean assumption will still hold. When the ZCM assumption holds we can assume that the OLS estimators of beta will still remain unbiased and consistent. Only in the event that the error e is correlated with the x variables will there exist bias in the ordinary least squares estimators.

b) As

is measured with an additive error this thus means that:

In the case that the measurement error remains independent of the x variables in the model then the zero conditional mean assumption will still hold, thus will result in the consistency and unbiasedness of ordinary least squares estimators, including that of the estimator. In our case however it states that the error is uncorrelated with the truth , and thus will be correlated with the explanatory variable. This is supported by:

Therefore this violates the zero conditional mean assumption resulting in the biasedness and inconsistency of all the ordinary least squares estimators. Thus will also be unbiased and inconsistent. c)

N=4268 R2=0.2095 The coefficient = 0.0620098, which can be interpreted as when the number of mailings per year increases by one unit, the corresponding probability of responding with a gift rises by 0.0620098 or 6.2%.

WILLIAM CHAU z3376203

ECON2206

TUESDAY 4-5 GOLDSTEIN G02 JASON YU

Resplast Avggift Propresp Mailsyear _cons

OLS Standard Errors .0180199 .0000848 .0336727 .0100362 .0245088

Het.-robust Standard Errors .0200238 .0000208 .0340123 .0105996 .0232924

Examining the above table we see that the standard errors between OLS and Het. Robust, are quite similar excluding the standard errors between Avggift.

d) H0=MLR5, H1: conditional heteroskedasticity exists within the regression residuals Step 1 : calculate the residuals, u-hat2, from the OLS model

N=4268 R2=0.2095

WILLIAM CHAU z3376203

ECON2206

TUESDAY 4-5 GOLDSTEIN G02 JASON YU

Step 2 : u-hat2 is regressed on the explanatory variables & the R2 the

is then saved.

T-Stat : P-value = 0.000

= 82.156

Therefore reject H0 at the 5% significance level in favour of H1 which says that heteroskedascity exists in the model. e) H(x)>0 known, respond is binary variable, thus allows us to find Var(u|all regressors) | x) = | x)= P(y=1|x) (1-P(y=1|x))

= E | x)(1-E( | x)) = (1- ) Therefore we conclude Var(u|all regressors) = Var(u|respond resplast avggift propresp mailsyear) = (1- ) f) Applying weighted least squares allows us to regain homoscedasticity in the model yi/hi = 0(1/hi)+ 1(xi1/hi) +...+ k(xik/hi) + ui/hi var(u|x) = 2h(x), h(x) > 0 known var{u/[h(x)]1/2 |x} = 2 The WLS will have weights of {1/ }, in which = (1- ) Factors that may prevent the implementation of WLS would be: when the fitted value is not inside (0,1), also when h(x) value is wrong. g)

WILLIAM CHAU z3376203

ECON2206

TUESDAY 4-5 GOLDSTEIN G02 JASON YU

Model after re-estimation :

N=4268, R-squared = 0.2008 When comparing this model with that in question c, we see that the models are very similar. However with the presence of heteroskedascity we can determine that the FGLS model is consistent in nature as well as asymptotically more efficient as opposed to the OLS model. h) When conducting RESET we add the squared and cubed fitted values of functions of x, hence the expanded model will undertake the form: H0 = = = 0 H1 = the model is misspecified

Based on the F-stat of 2.78, we fail to reject H0 in favour of the alternative H1, as the pvalue of 0.0619 is greater than 0.05, (5% significance level). Therefore the model is not misspecified. i) The test statistic: the overall significance F.

is chi-squared with 2 degrees of freedom under the null or

j) R-square from the white test will always be at least as large because we add one more variable and p-value becomes small.

WILLIAM CHAU z3376203

ECON2206

TUESDAY 4-5 GOLDSTEIN G02 JASON YU