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OLS assumptions are extremely important. The Use of OLS Assumptions. Derivation of OLS Estimator In class we set up the minimization problem that is the starting point for deriving the formulas for the OLS intercept and slope coe cient. When you need to estimate a sample regression function (SRF), the most common econometric method is the ordinary least squares (OLS) technique, which uses the least squares principle to fit a prespecified regression function through your sample data. Bottom line: we can always interpret OLS estimates as coefficients of BLP. The standard errors are measures of the sampling variability of the least squares estimates $$\widehat{\beta}_1$$ and $$\widehat{\beta}_2$$ in repeated samples - if we collect a number of different data samples, the OLS estimates will be different for each sample. Maximum likelihood estimators and least squares November 11, 2010 1 Maximum likelihood estimators A maximum likelihood estimate for some hidden parameter λ (or parameters, plural) of some probability distribution is a number λˆ computed from an i.i.d. If the OLS assumptions 1 to 5 hold, then according to Gauss-Markov Theorem, OLS estimator is Best Linear Unbiased Estimator (BLUE). As such, the OLS estimators are random variables and have their own distribution. The coefficient estimates that minimize the SSR are called the Ordinary Least Squared (OLS) estimates. That problem was, min ^ 0; ^ 1 XN i=1 (y i ^ 0 ^ 1x i)2: (1) As we learned in calculus, a univariate optimization involves taking the derivative and setting equal to 0. An estimator (a function that we use to get estimates) that has a lower variance is one whose individual data points are those that are closer to the mean. And then OLS always consistently estimates coefficients of Best Linear Predictor (because in BLP we have $\text{Cov}(u,x)=0$ from the definition). 1) 1 E(βˆ =β The OLS coefficient estimator βˆ 0 is unbiased, meaning that . sample X1,...,Xn from the given distribution that maximizes something For example, the maximum likelihood estimator in a regression setup with normal distributed errors is BLUE too, since the closed form of the estimator is identical to the OLS (but as a method, ML-estimation is clearly different from OLS… The only question is whether BLP corresponds to … The OLS estimator is one that has a minimum variance. $\begingroup$ The OLS estimator does not need to be the only BLUE estimator. This estimator is statistically more likely than others to provide accurate answers. In this article, we will not bother with how the OLS estimates are derived (although understanding the derivation of the OLS estimates really enhances your understanding of the implications of the model assumptions which we made earlier). 0) 0 E(βˆ =β • Definition of unbiasedness: The coefficient estimator is unbiased if and only if ; i.e., its mean or expectation is equal to the true coefficient β 1 βˆ 1) 1 E(βˆ =β 1. The least squares principle states that the SRF should be constructed (with the constant and slope values) […] The OLS coefficient estimator βˆ 1 is unbiased, meaning that . Ordinary Least Squares is the most common estimation method for linear models—and that’s true for a good reason.As long as your model satisfies the OLS assumptions for linear regression, you can rest easy knowing that you’re getting the best possible estimates.. Regression is a powerful analysis that can analyze multiple variables simultaneously to answer complex research questions. 3 Properties of the OLS Estimators The primary property of OLS estimators is that they satisfy the criteria of minimizing the sum of squared residuals. These are desirable properties of OLS estimators and require separate discussion in detail. Since the OLS estimators in the ﬂ^ vector are a linear combination of existing random variables (X and y), they themselves are random variables with certain straightforward properties.

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