Which of the Following Assumptions Is Required for Two Stage

question 12

Multiple Choice

Which of the following assumptions is required for two stage least squares estimation with time series data but not required for two-stage least squares estimation with cross sectional data?

• A)The conditional mean of the error term is zero.
• B)The error term has constant conditional variance.
• C) The model includes at least one dummy variable.
• D) The error terms are not serially correlated.

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Definitions:

Effective Rate

The actual interest rate that borrowers pay or investors receive on a financial product, once all the compounding periods are factored in, often higher than the nominal rate.

Compounding Interval

The frequency at which interest is applied to the principal sum of a loan or deposit, affecting the total interest earned or paid.

Compounded Nominal Rate

The rate of interest quoted for a period, usually a year, without taking into account the effect of compounding within that period.

Effective Rate

The actual interest rate of an investment or loan, taking into account the effect of compounding interest as opposed to the nominal or stated rate.