Financial Risk Manager Part 1

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A financial analyst is using ordinary least squares (OLS) estimation to explain the behavior of a financial variable. The analyst notes that the proper selection of regressors to include in an OLS estimation is critical to the accuracy of the result. When does omitted variable bias occur?

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Omitted variable bias occurs when the omitted variable is correlated with an included regressor and is a determinant of the dependent variable.

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Omitted variable bias occurs when the omitted variable is correlated with an included regressor but is not a determinant of the dependent variable.

Omitted variable bias occurs when the omitted variable is independent of an included regressor and is a determinant of the dependent variable.

Omitted variable bias occurs when the omitted variable is independent of an included regressor but is not a determinant of the dependent variable.