The Simple Regression Model

Part II

The Simple Regression Model

As of Sep 11, 2019

Seppo Pynnönen Econometrics I
The Simple Regression Model

Definition
1 The Simple Regression Model
Definition
Estimation of the model, OLS
OLS Statistics
Algebraic properties

Goodness-of-Fit, the R-square

Units of Measurement and Functional Form
Scaling and translation
Nonlinearities

Expected Values and Variances of the OLS Estimators

Unbiasedness
Variances
Estimating the Error Variance
Standard Errors of β̂0 and β̂1
Seppo Pynnönen Econometrics I
The Simple Regression Model

Definition

Two (observable) variables ”y ” and ”x”.

y = β0 + β1 x + u. (1)

Equation (1) defines the simple regression model.

Terminology:
y x
Dependent variable Independent variable
Explained variable Explanatory variable
Response variable Control variable
Predicted variable Predictor
Regressand Regressor

Seppo Pynnönen Econometrics I

The Simple Regression Model

Definition

Error term ui is a combination of a number of effects, like:

1 Omitted variables: Accounts the effects of variables omitted

from the model
2 Nonlinearities: Captures the effects of nonlinearities between
y and x. Thus, if the true model is yi = β0 + β1 xi + γxi2 + vi ,
and we assume that it is yi = β0 + β1 x + ui , then the effect of
xi2 is absorbed to ui . In fact, ui = γxi2 + vi .
3 Measurement errors: Errors in measuring y and x are
absorbed in ui .
4 Unpredictable effects: ui includes also inherently unpredictable
random effects.

Seppo Pynnönen Econometrics I

The Simple Regression Model

Estimation of the model, OLS

1 The Simple Regression Model
Definition
Estimation of the model, OLS
OLS Statistics
Algebraic properties

Goodness-of-Fit, the R-square

Units of Measurement and Functional Form
Scaling and translation
Nonlinearities

Expected Values and Variances of the OLS Estimators

Unbiasedness
Variances
Estimating the Error Variance
Standard Errors of β̂0 and β̂1
Seppo Pynnönen Econometrics I
The Simple Regression Model

Estimation of the model, OLS

Given observations (xi , yi ), i = 1, . . . , n, the task for an

econometrician is to estimate the population parameters β0
(intercept parameter) and β1 (slope parameter) of (1) in an
optimal way by utilizing the sample information.
Assumptions (classical assumptions)
1 Zero average error: E[ui ] = 0 for all i.
2 Homoskedasticity: var[ui ] = σ 2 for all i.
3 Uncorrelated errors: cov[ui , uj ] = 0, for all i 6= j.
Pn
i=1 (xi − x̄) > 0. ‫ﯾﻌﻧﯽ ﻣﺗﻐﯾﯾرھﺎ ﺑﺎﯾد ﺗﻐﯾﯾر ﮐﻧﻧد‬
4 2

5 cov[ui , xi ] = 0.

Seppo Pynnönen Econometrics I

The Simple Regression Model

Estimation of the model, OLS

Remark 1
Assumptions 1 and 2 are related to distributional properties of
the error term of which Assumption 1 can always be fulfilled
when the intercept term β0 is included to the regression in
(1). We discuss Assumption 2 later in more detail.
Assumption 3. is mostly relevant in time series data or
”clustered” data.
Assumption 5 is the key assumption how x and u are related,
expressed sometimes in terms the stronger assumption of
mean independence, E[ui |xi ] = E[ui ], which implies
cov[ui , xi ] = 0 when E[ui ] = 0.

Seppo Pynnönen Econometrics I

The Simple Regression Model

Estimation of the model, OLS

Exploring further 2.1, Wooldridge 5e, p.23

Suppose that a score on a final exam, score, depends on classes
attended (attend) and unobserved factors that affect exam performance
(such as student ability). Then

score = β0 + β1 attend + u. (2)

When would you expect this model to satisfy E[u|attend] = E[u]?

Seppo Pynnönen Econometrics I

The Simple Regression Model

Estimation of the model, OLS

The goal in the estimation is to find values for β0 and β1 of model

(1) such that the error terms is as small as possible (in a suitable
sense).
Under the above classical assumptions, the Ordinary Least Squares
(OLS) minimizes the residual sum of squares of the error terms
ui = yi − β0 − β1 xi , which produces optimal estimates for the
parameters (the optimality criteria are discussed later).
Denote the sum of squares as
n
X
2 ‫ زﯾﮕﻣﺎی ﺧطﺎ ﺑﮫ ﺗوان‬f (β0 , β1 ) = (yi − β0 − β1 xi )2 . (3)
i=1

The first order conditions (foc) for the minimum are found by
setting the partial derivatives equal to zero. Denote by β̂0 and β̂1
the values satisfying the foc.

Seppo Pynnönen Econometrics I

The Simple Regression Model

Estimation of the model, OLS

First order conditions:

n
∂f (β̂0 , β̂1 ) X
= −2 (yi − β̂0 − β̂1 xi ) = 0 (4)
∂β0
i=1

n
∂f (β̂0 , β̂1 ) X
= −2 xi (yi − β̂0 − β̂1 xi ) = 0 (5)
∂β1
i=1

These yield so called normal equations

P P
nβ̂0 + β̂1 xi = yi
(6)
β̂0 xi + β̂1 xi2 =
P P P
xi yi ,

where the summation is from 1 to n.

Seppo Pynnönen Econometrics I

The Simple Regression Model

Estimation of the model, OLS

The explicit solutions for β̂0 and β̂1 are (OLS estimators of β0 and
β1 ) Pn
(x − x̄)(yi − ȳ )
β̂1 = i=1 Pn i 2
(7)
i=1 (xi − x̄)

β̂0 = ȳ − β̂1 x̄, (8)

where
n n
1X 1X
x̄ = xi and ȳ = yi
n n
i=1 i=1
are the sample means.
In the solutions (7) and (8) we have used the properties
n
X n
X
(xi − x̄)(yi − ȳ ) = xi yi − nx̄ ȳ (9)
i=1 i=1
and
n
X n
X
(xi − x̄)2 = xi2 − nx̄ 2 . (10)
i=1Seppo Pynnönen Econometrics I
i=1
The Simple Regression Model

Estimation of the model, OLS

Fitted regression line:

ŷ = β̂0 + β̂1 x. u ‫ﻧدارد‬ (11)
Residuals:
‫ﺧطﺎی ﺣﻘﯾﻘﯽ‬
‫ﺧطﺎی ﺗﻘرﯾب‬ ûi = yi − ŷi
(12)
= (β0 − β̂0 ) + (β1 − β̂1 )xi + ui .

Thus the residual component ûi consist of the pure error term ui
and the sample errors due to the estimation of the parameters β0
and β1 .

Seppo Pynnönen Econometrics I

The Simple Regression Model

Estimation of the model, OLS

Remark 2
The slope coefficient β̂1 in terms of sample covariance of x and y and
variance of x.

Sample covariance:
n
1 X
sxy = (xi − x̄)(yi − ȳ ) (13)
n−1
i=1

Sample variance:
n
1 X
sx2 = (xi − x̄)2 . (14)
n−1
i=1

Thus
sxy
β̂1 = . (15)
sx2

Seppo Pynnönen Econometrics I

The Simple Regression Model

Estimation of the model, OLS

Remark 3
The slope coefficient β̂1 in terms of sample correlation and standard
deviations of x and y .

Sample correlation:
Pn
i=1 (xi − x̄)(yi − ȳ ) sxy
rxy = qP = , (16)
n
(x − x̄)2
P n
(y − ȳ ) 2 sx sy
i=1 i i=1 i

p q
where sx = sx2 and sy = sy2 are the sample standard deviations of x
and y , respectively.

Thus we can also write the slope coefficient in terms of sample standard
deviations and correlation as
sy
β̂1 = rxy . (17)
sx

Seppo Pynnönen Econometrics I

The Simple Regression Model

Estimation of the model, OLS

Example 1
Relationship between wage and eduction.
wage = average hourly earnings
educ = years of education
Data is collected in 1976, n = 526
Excerpt of the data set wage.raw (Wooldridge)

wage (y ) educ (x)

3.10 11
3.24 12
3.00 11
6.00 8
5.30 12
8.75 16
11.25 18
5.00 12
3.60 12
18.18 17
6.25 16
. .
. .
. .

Seppo Pynnönen Econometrics I

The Simple Regression Model

Estimation of the model, OLS

Scatterplot of the data with regression line.

30

25

20
Hourly earnings

15

10

0
0 2 4 6 8 10 12 14 16 18 20

-5
Eduction (years)

Figure 2.2: Wages and education.

Seppo Pynnönen Econometrics I

The Simple Regression Model

Estimation of the model, OLS

Sample statistics:

Wage Educ
Mean 5.90 12.56
Standard deviation 3.69 2.769
n 526 526
Correlation 0.406

Seppo Pynnönen Econometrics I

The Simple Regression Model

Estimation of the model, OLS

Eviews estimation results:

Dependent Variable: WAGE
Method: Least Squares
Date: 02/07/06 Time: 20:25
Sample: 1 526
Included observations: 526

Variable Coefficient Std. Error t-Statistic Prob.

C -0.904852 0.684968 -1.321013 0.1871

EDUC 0.541359 0.053248 10.16675 0.0000

R-squared 0.164758 Mean dependent var 5.896103

Adjusted R-squared 0.163164 S.D. dependent var 3.693086
S.E. of regression 3.378390 Akaike info criterion 5.276470
Sum squared resid 5980.682 Schwarz criterion 5.292688
Log likelihood -1385.712 F-statistic 103.3627
Durbin-Watson stat 1.823686 Prob(F-statistic) 0.000000

The estimated model is

ŷ = −0.905 + 0.541x.

Thus the model predicts that an additional year increases hourly wage on
average by 0.54 dollars.
Using (17) you can verify the OLS estimate for β1 can be computed
using the correlation and standard deviations. After that, applying (8)
you get OLS estimate for the intercept. Thus in all, the estimates can be
derived from the basic sample statistics.
Seppo Pynnönen Econometrics I
The Simple Regression Model

OLS Statistics
1 The Simple Regression Model
Definition
Estimation of the model, OLS
OLS Statistics
Algebraic properties

Goodness-of-Fit, the R-square

Units of Measurement and Functional Form
Scaling and translation
Nonlinearities

Expected Values and Variances of the OLS Estimators

Unbiasedness
Variances
Estimating the Error Variance
Standard Errors of β̂0 and β̂1
Seppo Pynnönen Econometrics I
The Simple Regression Model

OLS Statistics

n
X
ûi = 0. (18)
i=1
n
X
xi ûi = 0. (19)
i=1

ȳ = β̂0 + β̂1 x̄. (20)

n
X
SST = (yi − ȳ )2 . (21)
i=1
Xn
SSE = (ŷi − ȳ )2 . (22)
i=1
Xn
SSR = (yi − ŷi )2 . (23)
i=1
Seppo Pynnönen Econometrics I
The Simple Regression Model

OLS Statistics

It can be shown that

n
X n
X n
X
(yi − ȳ )2 = (ŷi − ȳ )2 + (yi − ŷi )2 , (24)
i=1 i=1 i=1

that is
SST = SSE + SSR. (25)

Prove this!
Remark 4
It is unfortunate that different books and different statistical packages
use different definitions, particularly for SSR and SSE. In many the
former means Regression sum of squares and the latter Error sum of
squares. I.e., just the opposite we have here!

Seppo Pynnönen Econometrics I

The Simple Regression Model

Goodness-of-Fit, the R-square

1 The Simple Regression Model
Definition
Estimation of the model, OLS
OLS Statistics
Algebraic properties

Goodness-of-Fit, the R-square

Units of Measurement and Functional Form
Scaling and translation
Nonlinearities

Expected Values and Variances of the OLS Estimators

Unbiasedness
Variances
Estimating the Error Variance
Standard Errors of β̂0 and β̂1
Seppo Pynnönen Econometrics I
The Simple Regression Model

Goodness-of-Fit, the R-square

R-square (coefficient of determination)

SSE SSR
R2 = =1− . (26)
SST SST

The positive square root of R 2 , denoted as R, is called the

multiple correlation.
Remark 5
Here in the case of simple regression R 2 = rxy
2
, i.e. R = |rxy |. These do
not hold in the general case (multiple regression)!

Prove Remark 5 by yourself.

Remark 6
Generally it holds for the OLS estimation, however, that R = ry ŷ , i.e.
correlation between the observed and fitted (or predicted) values.
Seppo Pynnönen Econometrics I
The Simple Regression Model

Goodness-of-Fit, the R-square

Remark 7
It is obvious that 0 ≤ R 2 ≤ 1 with R 2 = 0 representing no linear relation
between x and y and R 2 = 1 representing a perfect fit.

Adjusted R-square:

su2
R̄ 2 = 1 − , (27)
sy2
where
n
1 X
su2 = (yi − ŷi )2 (28)
n−2
i=1
is an estimate of the residual variance
σu2 = var[u].
We find easily that
n−2
R̄ 2 = 1 − (1 − R 2 ). (29)
n−1
Seppo Pynnönen
2 Econometrics
2 I
The Simple Regression Model

Goodness-of-Fit, the R-square

Example 2
In the previous example R 2 = 0.164758 and adjusted R-squared,
R̄ 2 = 0.163134. The R 2 tells that about 16.5 percent of the variation in
the hourly earnings can be explained by education. However, the rest
83.5 percent is not accounted by the model.

Seppo Pynnönen Econometrics I

The Simple Regression Model

Units of Measurement and Functional Form

1 The Simple Regression Model
Definition
Estimation of the model, OLS
OLS Statistics
Algebraic properties

Goodness-of-Fit, the R-square

Units of Measurement and Functional Form
Scaling and translation
Nonlinearities

Expected Values and Variances of the OLS Estimators

Unbiasedness
Variances
Estimating the Error Variance
Standard Errors of β̂0 and β̂1
Seppo Pynnönen Econometrics I
The Simple Regression Model

Units of Measurement and Functional Form

Consider the simple regression model

yi = β0 + β1 xi + ui (30)

with σu2 = var[ui ].

Let yi∗ = a0 + a1 yi and xi∗ = b0 + b1 xi , a1 6= 0 and b1 6= 0. Then
(30) becomes
yi∗ = β0∗ + β1∗ xi∗ + ui∗ , (31)
where
a1
β0∗ = a1 β0 + a0 − β1 b0 , (32)
b1
a1
β1∗ = β1 , (33)
b1
and
σu2∗ = a12 σu2 . (34)

Seppo Pynnönen Econometrics I

The Simple Regression Model

Units of Measurement and Functional Form

Remark 8
Coefficients a1 and b1 scale the measurements and a0 and b0 shift the
measurements.

For example, if y is temperature measured in Celsius, then

9
y ∗ = 32 + y
5
gives temperature in Fahrenheit.

Seppo Pynnönen Econometrics I

The Simple Regression Model

Units of Measurement and Functional Form

Example 3
Let the estimated model be

ŷi = β̂0 + β̂1 xi .

”Demeaned” observations:

yi∗ = yi − ȳ and xi − x̄. So a0 = −ȳ , b0 = −x̄, and a1 = b1 = 1.

Because β̂0 = ȳ − β̂1 x̄, we obtain from (32)

β̂0∗ = β̂0 − (ȳ − β̂1 x̄) = 0.

So
ŷ ∗ = β̂1 x ∗ .
(Note β̂1 remains unchanged).

Seppo Pynnönen Econometrics I

The Simple Regression Model

Units of Measurement and Functional Form

If we further define a1 = 1/sy and b1 = 1/sx , where sy and sx are the

sample standard deviations of y and x, respectively. Applying the
transformation yields standardized observations
yi − ȳ xi − x̄
yi∗ = and xi∗ = .
sy sx

Then again β̂0 = 0. The slope coefficient becomes

sx
β̂1∗ = β̂1 ,
sy

which is called standardized regression coefficient.

As an exercise show that in this case β̂1∗ = rxy , the correlation coefficient
of x and y .

Seppo Pynnönen Econometrics I

The Simple Regression Model

Units of Measurement and Functional Form

1 The Simple Regression Model
Definition
Estimation of the model, OLS
OLS Statistics
Algebraic properties

Goodness-of-Fit, the R-square

Units of Measurement and Functional Form
Scaling and translation
Nonlinearities

Expected Values and Variances of the OLS Estimators

Unbiasedness
Variances
Estimating the Error Variance
Standard Errors of β̂0 and β̂1
Seppo Pynnönen Econometrics I
The Simple Regression Model

Units of Measurement and Functional Form

Logarithmic transformation is one of the most applied

transformation for economic variables.
Table 2.1 Functional forms including log-transformations
Dependent Independent Interpretation
Model variable variable of β1
level-level y x ∆y = β1 ∆x
level-log y log(x) ∆y = (β1 /100)%∆x
log-level log(y ) x %∆y = (100β1 )∆x
log-log log(y ) log(x) %∆y = β1 %∆x

Can you find the rationale for the interpretations?

Remark 9
Log-transformation can be only applied to variables that assume strictly
positive values!
Seppo Pynnönen Econometrics I
The Simple Regression Model

Units of Measurement and Functional Form

Example 4
Consider again the wage example.

Suppose we believe that instead of the absolute change a better choice is

to consider the percentage change of wage (y ) as a function of education
(x). Then we would consider the model

log(y ) = β0 + β1 x + u.

Estimation of this model yields

Coefficients:
Estimate Std. Error t value Pr(>|t|)
(Intercept) 0.583773 0.097336 5.998 3.74e-09 ***
educ 0.082744 0.007567 10.935 < 2e-16 ***
---
Signif. codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1

Residual standard error: 0.4801 on 524 degrees of freedom

Multiple R-squared: 0.1858,Adjusted R-squared: 0.1843
F-statistic: 119.6 on 1 and 524 DF, p-value: < 2.2e-16

Seppo Pynnönen Econometrics I

The Simple Regression Model

Units of Measurement and Functional Form

That is
\) = 0.584 + 0.083x
log(y (35)
2
n = 526, R = 0.186. Note that R-squares of this model and the
level-level model are not comparable.

The model predicts that an additional year of education increases on

average hourly earnings by 8.3%.

Seppo Pynnönen Econometrics I

The Simple Regression Model

Units of Measurement and Functional Form

Remark 10
Typically all models where transformations on y and x are functions of
these variables alone can be cast to the form of linear model. That is, if
have generally
g (y ) = β0 + β1 h(x) + u, (36)
where g and h are functions, then defining y ∗ = g (y ) and x ∗ = h(x) we
have a linear model
y ∗ = β0 + β1 x ∗ + u.
Note, however, that all models cannot be cast to a linear form. An
example is
1
cons = + u.
β0 + β1 income

Seppo Pynnönen Econometrics I

The Simple Regression Model

Expected Values and Variances of the OLS Estimators

1 The Simple Regression Model
Definition
Estimation of the model, OLS
OLS Statistics
Algebraic properties

Goodness-of-Fit, the R-square

Units of Measurement and Functional Form
Scaling and translation
Nonlinearities

Expected Values and Variances of the OLS Estimators

Unbiasedness
Variances
Estimating the Error Variance
Standard Errors of β̂0 and β̂1
Seppo Pynnönen Econometrics I
The Simple Regression Model

Expected Values and Variances of the OLS Estimators

We say generally
h i that an estimator of θ̂ of a parameter θ is
unbiased if E θ̂ = θ.

Theorem 1
Under the classical assumptions 1–5
h i h i
E β̂0 = β0 and E β̂1 = β1 . (37)

Proof: Given observations x1 , . . . , xn the expectations are conditional on

the given xi -values.

We prove first the unbiasedness of β̂1 . Now

P P
β̂1 = Pi −x̄)(yi −ȳ
(x )
=P(xi −x̄)y2i
(xi −x̄)2 (xi −x̄)
P P P
= P(xi −x̄)β20 + β1 P(x i −x̄)xi P(xi −x̄)u2i (38)
(xi −x̄) (xi −x̄)2 + (xi −x̄)

P 1
Seppo Pynnönen
PEconometrics I
The Simple Regression Model

Expected Values and Variances of the OLS Estimators

I.e.,
1 X
β̂1 = β1 + P (xi − x̄)ui . (39)
(xi − x̄)2
Because xi s fixed we get
h i 1 X
E β̂1 = β1 + P 2
(xi − x̄)E[ui ] = β1 (40)
(xi − x̄)

Because E[ui ] = 0 by assumption 1. Thus β̂1 is unbiased.

Proof of unbiasedness of β̂0 is left to students.

Seppo Pynnönen Econometrics I

The Simple Regression Model

Expected Values and Variances of the OLS Estimators

1 The Simple Regression Model
Definition
Estimation of the model, OLS
OLS Statistics
Algebraic properties

Goodness-of-Fit, the R-square

Units of Measurement and Functional Form
Scaling and translation
Nonlinearities

Expected Values and Variances of the OLS Estimators

Unbiasedness
Variances
Estimating the Error Variance
Standard Errors of β̂0 and β̂1
Seppo Pynnönen Econometrics I
The Simple Regression Model

Expected Values and Variances of the OLS Estimators

Theorem 2
Under the classical assumptions 1 through 5 and given x1 , . . . , xn
h i σu2
var β̂1 = Pn 2
, (41)
i=1 (xi − x̄)

h i 1 x̄ 2

var β̂0 = +P σu2 . (42)
n (xi − x̄)2
and for ŷ = β̂0 + β̂1 x with given x

(x − x̄)2
 
1
var[ŷ ] = +P σu2 . (43)
n (xi − x̄)2

Seppo Pynnönen Econometrics I

The Simple Regression Model

Expected Values and Variances of the OLS Estimators

Proof: Again we prove as an example only (41). Using (39) and the
properties of variance with x1 , . . . , xn given
h i h i
= var β1 + P(xi1−x̄)2 (xi − x̄)ui
P
var β̂1
‫وارﯾﺎﻧس ﺑر ﮐل‬
 2 P ‫ﺳﯾﮕﻣﺎ اﻋﻣﺎل ﻧﻣﯾﺷود‬،
= P 1 (xi − x̄)2 var[ui ] ‫ﺑﻠﮑﮫ ﺑر ﺗﮏ ﺗﮏ‬
(xi −x̄)2
‫ﻋﺑﺎرات زﯾر ﺳﯾﮕﻣﺎ‬
 2 P ‫اﻋﻣﺎل ﻣﯾﺷود‬
= P 1 (xi − x̄)2 σu2 (44)
(xi −x̄)2

σu2 (xi −x̄)2

P
= ( (xi −x̄)2 )2
P

2
= P σu 2 .
(xi −x̄)

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The Simple Regression Model

Expected Values and Variances of the OLS Estimators

Remark 11
(42) can be written equivalently as

σu2 xi2
h i P
var β̂0 = P . (45)
n (xi − x̄)2

Seppo Pynnönen Econometrics I

The Simple Regression Model

Expected Values and Variances of the OLS Estimators

1 The Simple Regression Model
Definition
Estimation of the model, OLS
OLS Statistics
Algebraic properties

Goodness-of-Fit, the R-square

Units of Measurement and Functional Form
Scaling and translation
Nonlinearities

Expected Values and Variances of the OLS Estimators

Unbiasedness
Variances
Estimating the Error Variance
Standard Errors of β̂0 and β̂1
Seppo Pynnönen Econometrics I
The Simple Regression Model

Expected Values and Variances of the OLS Estimators

Recalling from equation (12) the residual ûi = yi − ŷi is of the form

ûi = ui − (β̂0 − β0 ) − (β̂1 − β1 )xi . (46)

This reminds us about the difference between the error term ui and
the residual term ûi .
An unbiased estimator of the error variance σu2 = var[ui ] is
n
1 X 2
σ̂u2 = ûi . (47)
n−2
i=1

Taking the (positive) square

p root gives an estimator for the error
standard deviation σu = σu2 , called usually the standard error of
regression r
1 X 2
σ̂u = ûi . (48)
n−2

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The Simple Regression Model

Expected Values and Variances of the OLS Estimators

Theorem 3
Under the assumption (1)–(5)

E σ̂u2 = σu2 ,
 

i.e., σ̂ 2 is an unbiased estimator of σu2 .

Proof: Omitted.

Seppo Pynnönen Econometrics I

The Simple Regression Model

Expected Values and Variances of the OLS Estimators

1 The Simple Regression Model
Definition
Estimation of the model, OLS
OLS Statistics
Algebraic properties

Goodness-of-Fit, the R-square

Units of Measurement and Functional Form
Scaling and translation
Nonlinearities

Expected Values and Variances of the OLS Estimators

Unbiasedness
Variances
Estimating the Error Variance
Standard Errors of β̂0 and β̂1
Seppo Pynnönen Econometrics I
The Simple Regression Model

Expected Values and Variances of the OLS Estimators

Replacing in (41) and (42) σu2 by σ̂u2 and taking square roots give
the standard error of β̂1 and β̂0
σ̂u
se(β̂1 ) = pP (49)
(xi − x̄)2

and s
1 x̄ 2
se(β̂0 ) = σ̂u +P . (50)
n (xi − x̄)2

These belong to the standard output of regression estimation, see

computer print-outs above.

Seppo Pynnönen Econometrics I