Financial Risk Manager Part 1
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Which of the following best defines the omitted variable bias under multiple regression?
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NNikitesh
A
The bias that emerges whenever an omitted determinant of the dependent variable is correlated with at least one of the included regressors.
B
The bias that emerges whenever two or more included regressors are correlated with an omitted variable.
C
The bias that emerges whenever one or more included regressors are uncorrelated with an omitted variable.
D
The bias that emerges whenever one or more included regressors are positively correlated with an omitted variable.
Explanation:
The omitted variable bias exists whenever an omitted determinant of Y (the dependent variable) is correlated with at least one of the included regressor variables. This is the standard definition in econometrics and regression analysis. When an important variable that affects the dependent variable is omitted from the regression model and that omitted variable is correlated with one or more included regressors, the estimated coefficients for those included regressors become biased and inconsistent. Option A correctly captures this definition, while the other options are either incorrect or incomplete descriptions of omitted variable bias.
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