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Answer: Omitted variable bias occurs when the omitted variable is correlated with at least one of the included independent variables and is a determinant of the dependent variable.
B is correct. Omitted variable bias occurs when a model improperly omits one or more variables that are critical determinants of the dependent variable and are correlated with one or more of the other included independent variables. Omitted variable bias results in an over- or under-estimation of the regression parameters. A, C, and D are incorrect per the explanation of B above.
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In the context of an actuary estimating an Ordinary Least Squares (OLS) regression model to evaluate the performance of an insurance company, under what circumstances could the problem of omitted variable bias emerge, potentially reducing the accuracy of the results?
A
Omitted variable bias occurs when the omitted variable is correlated with all of the included independent variables and is a determinant of the dependent variable.
B
Omitted variable bias occurs when the omitted variable is correlated with at least one of the included independent variables and is a determinant of the dependent variable.
C
Omitted variable bias occurs when the omitted variable is independent of the included independent variables and is a determinant of the dependent variable.
D
Omitted variable bias occurs when the omitted variable is independent of the included independent variables but is not a determinant of the dependent variable.
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