medium · Quantitative Finance prob-stats
If the true population model is y = α + β x + ε, but the errors ε_i are correlated with the predictor x_i, what is the status of the OLS estimator?
- The R² will be exactly zero.
- It is biased and inconsistent.
- It is still consistent but the standard errors are wrong.
- It remains unbiased but is no longer BLUE.
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