## October 9 In-Class Review Problems

Based on Problem 4.1 in the text:

Which of the following can cause the usual OLS t-statistics to be invalid?

a)  heteroskedasticity

b)  omitting an important variable

c)  including two highly correlated independent variables

d)  both a) & b)

Based on Problem 4.10 in the text:

I want to test the efficient market hypothesis (i.e. that market returns are not predictable) and thus obtain the following Stata output:

Source | SS df MS Number of obs = 142

------+------F( 4, 137) = 1.41

Model | 8649.26028 4 2162.31507 Prob > F = 0.2347

Residual | 210446.917 137 1536.10888 R-squared = 0.0395

Total | 219096.178 141 1553.8736 Root MSE = 39.193

------

return | Coef. Std. Err. t P>|t| [95% Conf. Interval]

------+------

dkr | .3205444 .2009106 1.60 0.113 -.0767426 .7178314

eps | .0426986 .0781384 0.55 0.586 -.1118147 .1972119

netinc | -.0051086 .0046748 -1.09 0.276 -.0143526 .0041354

salary | .0034993 .0021935 1.60 0.113 -.0008382 .0078369

_cons | -14.37022 6.893616 -2.08 0.039 -28.00187 -.7385649

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a)  the lowest level I can definitely reject the hypothesis at is 3.95%

b)  the lowest level I can definitely reject the hypothesis at is 23.47%

c)  none of the x variables are significant, so I definitely can’t reject

Based on Problem 4.17 in the text:

I produce the following output from Stata, where tenexp=tenure+experience:

lwage | Coef. Std. Err. t P>|t| [95% Conf. Interval]

------+------

educ | .0748638 .0065124 11.50 0.000 .062083 .0876446

tenure | -.0019537 .0047434 -0.41 0.681 -.0112627 .0073554

tenexp | .0153285 .0033696 4.55 0.000 .0087156 .0219413

_cons | 5.496696 .1105282 49.73 0.000 5.279782 5.713609

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a)  I can conclude that tenure has a negative, but insignificant effect on wage

b)  I can conclude that experience has a positive and significant effect on wage

c)  I can conclude that the effect of tenure and experience are not significantly different

d)  I can conclude both b) and c)