Re: Re: st: about residuals and coefficients

[Yuval Arbel <yuval.arbel@gmail.com>]

David,

I believe there are two levels in the regression analysis: 1) what is
desirable; 2) what is possible to achieve.

In terms of desirability, the objective of the regression analysis is
to isolate the effect of each covariate after controlling other
factors (what we call "under equal conditions" or "ceteris paribus")

In terms of actual possibility - the degree of success depends (among
other things) on the degree of collinearity.

High and low collinearity are dealt with in each and every Econometric
textbook that I am familiar with.

Moreover, the example of repair expenditures on Toyota car as a linear
function of mileage and age of the car is very well known: it yield
negative coefficient on one of the explanatory variable (implying the
implausible outcome that as the age of the car goes up, the repair
expenditures goes down. This problem is resolved when one of these
variables are omitted.

In term of correct practice - if you get implausible outcome - the
first thing you should eliminate - is high collinearity.

At least the textbooks I know reflect this insight.

P.S. There is a possible methodology to remedy collinearity called ORR
- and I believe it also exists in Stata. Economists don't like this
methodology very much - because you enter a bias into the model, in
order to decrease collinearity

On Thu, Sep 5, 2013 at 10:39 AM, Christopher Baum <kit.baum@bc.edu> wrote:
> <>
> On Sep 5, 2013, at 2:33 AM, David wrote:
>
>> The article by Filoso performs a valuable service by calling attention
>> to the "Frisch-Waugh-Lovell theorem." I wish more people, especially
>> authors of textbooks, were aware of that property of  regression.
>>
>> I do not understand, though, why that result should be called a
>> theorem or why it should be attributed to Frisch, Waugh, and Lovell.
>> A 1907 paper by Yule contains a more-general result.
>
> We use the term FWL theorem in the ivreg2 documentation and papers describing that software (Baum, Schaffer, Stillman, Stata J 2003, 2007). Greene's widely used Econometric Analysis (5th ed., the one handy at this moment) has a box on p. 27
> "Theorem 3.3 Frisch-Waugh Theorem", which undoubtedly contributes to the widespread use of this terminology. Greene's bibliography includes the Frisch and Waugh article in Econometrica vol. 1 (!!), 1933.  Hayashi's popular textbook also contains a mention of the Frishc-Waugh theorem.
>
> Yule may have made this point first, but then Hal White did not invent Huber-White-Sandwich standard errors, nor did Lars
> Hansen invent GMM. Economists are fond of naming things after the author of the article they read on the subject rather than its inventor.
>
> Kit
>
> Kit Baum   |   Boston College Economics & DIW Berlin   |   http://ideas.repec.org/e/pba1.html
>                              An Introduction to Stata Programming  |   http://www.stata-press.com/books/isp.html
>   An Introduction to Modern Econometrics Using Stata  |   http://www.stata-press.com/books/imeus.html
>                                                                                                    | http://www.crup.com.cn/Item/111779.aspx
>
>
> *
> *   For searches and help try:
> *   http://www.stata.com/help.cgi?search
> *   http://www.stata.com/support/faqs/resources/statalist-faq/
> *   http://www.ats.ucla.edu/stat/stata/



-- 
Dr. Yuval Arbel
School of Business
Carmel Academic Center
4 Shaar Palmer Street,
Haifa 33031, Israel
e-mail1: yuval.arbel@carmel.ac.il
e-mail2: yuval.arbel@gmail.com
You can access my latest paper on SSRN at:  http://ssrn.com/abstract=2263398
You can access previous papers on SSRN at: http://ssrn.com/author=1313670

*
*   For searches and help try:
*   http://www.stata.com/help.cgi?search
*   http://www.stata.com/support/faqs/resources/statalist-faq/
*   http://www.ats.ucla.edu/stat/stata/