Question

1. If the data frequency is monthly and we need to model seasonality, we could use either ………………………
seasonal dummies and an intercept or ………………………….. dummies without intercept. If we used
…………………… dummies and an intercept, the model cannot be estimated by OLS due to perfect
………………….. .

Answer 1

If the data frequency is monthly and we need to model seasonality, we could use either 3
seasonal dummies and an intercept or 4 dummies without intercept. If we used
4 dummies and an intercept, the model cannot be estimated by OLS due to perfect collinearity.

Explanation:

If the data frequency is monthly and we need to model seasonality, we have 2 options:

Option 1:

Conduct Regression Analysis on an intercept and the seasonal dummies, omitting one seasonal dummy

Option 2:

Conduct Regression Analysis on all the seasonal dummies omitting the intercept.

We cannot conduct Regression Analysis on all the seasonal dummies plus the intercept.because they will be collinear.