Answer-first summary for fast verification
Answer: Omitted variable bias occurs when the omitted variable is correlated with an included regressor and is a determinant of the dependent variable.
**Correct Answer: A** **Explanation:** 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. **Key Points:** - For omitted variable bias to occur, the omitted variable must be: 1. A determinant of the dependent variable (affects Y) 2. Correlated with at least one included regressor - If the omitted variable is not correlated with included regressors (option C), its omission doesn't cause bias, though it may reduce model efficiency. - If the omitted variable is not a determinant of Y (option B), its omission doesn't affect the estimation. - Option D describes a scenario where omitted variable bias does not occur.
Author: LeetQuiz .
Ultimate access to all questions.
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?
A
Omitted variable bias occurs when the omitted variable is correlated with an included regressor and is a determinant of the dependent variable.
B
Omitted variable bias occurs when the omitted variable is correlated with an included regressor but is not a determinant of the dependent variable.
C
Omitted variable bias occurs when the omitted variable is independent of an included regressor and is a determinant of the dependent variable.
D
Omitted variable bias occurs when the omitted variable is independent of an included regressor but is not a determinant of the dependent variable.
No comments yet.