Consider the model Y i = 1 + 2 X 2i + u i ..
Question:
Consider the model
Yi = β1 + β2X2i + ui…………….. (1)
To find out whether this model is mis-specified because it omits the variable X3 from the model, you decide to regress the residuals obtained from model (1) on the variable X3 only. (There is an intercept in this regression.) The Lagrange multiplier (LM) test, however, requires you to regress the residuals from model (1) on both X2 and X3 and a constant. Why is your procedure likely to be inappropriate?
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Step by Step Answer:
The correct model is Y i 1 2 X 2i X 3i u i But if you omit X 3 from this model ...View the full answer
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Anurag Agrawal
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