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)
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)
