, ECS4863 Assignment 1 (COMPLETE ANSWERS) Semester
1 2025 - DUE 16 May 2025; 100% correct solutions and
explanations.
Question 1.1: Explain the concept of omitted variable bias
and distinguish between positive and negative bias
(4 marks)
Omitted variable bias occurs in a regression model when a
relevant explanatory variable is left out and this omitted variable
is correlated with both the dependent variable and one or more
included explanatory variables. This causes the estimated
coefficients to be biased and inconsistent.
Positive bias happens when the omitted variable is
positively correlated with both the dependent variable and
the included explanatory variable. The estimated
coefficient is overstated.
Negative bias occurs when the omitted variable is
negatively correlated with either the dependent variable or
the included explanatory variable. The estimated
coefficient is understated.
Question 1.2: Explain in your own words how you test serial
correlation with strictly exogenous variables
(3 marks)
To test for serial correlation when variables are strictly
exogenous, we usually use the Durbin-Watson test or the
Breusch-Godfrey test. These tests check whether the error
terms in a regression model are correlated across time. If the
1 2025 - DUE 16 May 2025; 100% correct solutions and
explanations.
Question 1.1: Explain the concept of omitted variable bias
and distinguish between positive and negative bias
(4 marks)
Omitted variable bias occurs in a regression model when a
relevant explanatory variable is left out and this omitted variable
is correlated with both the dependent variable and one or more
included explanatory variables. This causes the estimated
coefficients to be biased and inconsistent.
Positive bias happens when the omitted variable is
positively correlated with both the dependent variable and
the included explanatory variable. The estimated
coefficient is overstated.
Negative bias occurs when the omitted variable is
negatively correlated with either the dependent variable or
the included explanatory variable. The estimated
coefficient is understated.
Question 1.2: Explain in your own words how you test serial
correlation with strictly exogenous variables
(3 marks)
To test for serial correlation when variables are strictly
exogenous, we usually use the Durbin-Watson test or the
Breusch-Godfrey test. These tests check whether the error
terms in a regression model are correlated across time. If the
