Stochastic Regression Functions
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What are the similarities and/or differences between a stochastic population regression function (PRF) and a stochastic sample regression function (SRF)?
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Solution Summary
The similarities and/or differences between a stochastic population regression function (PRF) and a stochastic sample regression function (SRF).
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Hello,
First I would to clarify some important concepts.
- What is a regression?
It is a mathematical expression or a function which shows how 2 or more variables are related. So in a regression we have 1 dependent variable, 1 or more independent variable(s) and an error term. These variables can have a linear or a non-linear relationship depending what theory we want to express with the regression. For example, we know that consumption is a function of income, and other assets. Is this a linear relationship? Yes, because we spend more when we have more money.
The error term indicates that the regression is a stochastic function, i. e. it depends on human behavior. Therefore its estimates will not be 100% accurate. Remember that in econometrics we are dealing with probabilities therefore ...
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