In order to use the t-statistic for hypothesis testing and constructing a 95% confidence interval as $\pm$ 1.96 standard errors, the following three assumptions have to hold: A)the conditional mean of u_i, given X_i is zero; (X_i,Y_i), i = 1,2, …, n are i.i.d. draws from their joint distribution; X_i and u_i have four moments B)the conditional mean of u_i, given X_i is zero; (X_i,Y_i), i = 1,2, …, n are i.i.d. draws from their joint distribution; homoskedasticity C)the conditional mean of u_i, given X_i is zero; (X_i,Y_i), i = 1,2, …, n are i.i.d. draws from their joint distribution; the conditional distribution of u_igiven X_i is normal D)none of the above

Question

Quizplus · Accepted Answer

The first assumption is the conditional mean of u_i, given X_i is zero. This is the assumption of linearity. The second assumption is that (X_i,Y_i), i = 1,2, …, n are i.i.d. draws from their joint distribution. This is the assumption of independence. The third assumption is that X_i and u_i have four moments. This is the assumption of finite variance.

In Order to Use the T-Statistic for Hypothesis Testing and Constructing