t1 - ^VE x22iVEx32i
In all these formulas a2 is the (homoscedastic) variance of the population disturbances u.
Following the argument of Appendix 3A, Section 3A.5, the reader can verify that an unbiased estimator of a2 is given by a 2 =
7The derivations of these formulas are easier using matrix notation. Advanced readers may refer to App. C.
8Using the definition of r given in Chap. 3, we have
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