ECS4863 Assignment 1 (COMPLETE ANSWERS) 2025 - DUE 16 May 2025

ECS4863
ASSIGNMENT 1 2025

UNIQUE NO.
DUE DATE: 16 MAY 2025

, Question 1: Theoretical Concepts (15 marks)

Provide detailed, original explanations in your own words:

1.1 Omitted Variable Bias

 Definition: Arises when a model excludes a relevant variable correlated with
both the dependent variable and one or more included regressors.
 Positive Bias: Estimated coefficient is larger than its true value.
 Negative Bias: Estimated coefficient is smaller (or even negative) than it should
be.

1.2 Serial Correlation (with strictly exogenous variables)

 Use the Durbin-Watson test or Breusch-Godfrey test.
 Explain how to interpret results.

1.3 Heteroscedasticity

 Variance of the error term is not constant.
 Affects standard errors → invalid hypothesis testing.
 Detect via Breusch-Pagan or White tests.

1.4 a) Covariance Stationarity

 A time series is stationary if mean, variance, and covariance remain constant
over time.
b) Sequential Exogeneity
 Error term at time t is uncorrelated with present and past explanatory variables.




Question 2: Time Series from Another Country (5 marks)