-2 a nYxi

se (¿1) =

where var = variance and se = standard error and where a2 is the constant or homoscedastic variance of ui of Assumption 4.

All the quantities entering into the preceding equations except a2 can be estimated from the data. As shown in Appendix 3A, Section 3A.5, a2 itself is estimated by the following formula:

where a2 is the OLS estimator of the true but unknown a2 and where the expression n — 2 is known as the number of degrees of freedom (df), Y U being the sum of the residuals squared or the residual sum of squares (RSS).18

Once Y U is known, a2 can be easily computed. Y U itself can be computed either from (3.1.2) or from the following expression (see Section 3.5 for the proof):

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