Introductory Econometrics: A Modern Approach 6th Edition by Jeffrey M Wooldridge

Exercise 23

Use the data in CEOSAL2.RAW to answer this question.

(i) Estimate the model

by OLS using all of the observations, where lsalary, lsales, and lmktvale are all natural logarithms. Report the results in the usual form with the usual OLS standard errors. (You may verify that the heteroskedasticity-robust standard errors are similar.)

(ii) In the regression from part (i) obtain the studentized residuals; call these str_i. How many studentized residuals are above 1.96 in absolute value? If the studentized residuals were independent draws from a standard normal distribution, about how many would you expect to be above two in absolute value with 177 draws?

(iii) Reestimate the equation in part (i) by OLS using only the observations with |str_i | ? 1. 96. How do the coefficients compare with those in part (i)?

(iv) Estimate the equation in part (i) by LAD, using all of the data. Is the estimate of

(v) Evaluate the following statement: “Dropping outliers based on extreme values of studentized residuals makes the resulting OLS estimates closer to the LAD estimates on the full sample.”

Step 1 of 15

Consider the provided data set “CEOSAL2” to solve the subparts and write down the whole data in to Minitab worksheet, the screenshot is shown below: