The GLS estimator
A)is always the more efficient estimator when compared to OLS.
B)is the OLS estimator of the coefficients in a transformed model, where the errors of the transformed model satisfy the Gauss-Markov conditions.
C)cannot handle binary variables, since some of the transformations require division by one of the regressors.
D)produces identical estimates for the coefficients, but different standard errors.

Question

Quizplus · Accepted Answer

The GLS estimator is obtained by transforming the original model so that the errors satisfy the Gauss-Markov conditions, and then using OLS on the transformed model. Therefore, choice B is correct. Choice A is incorrect because the efficiency of GLS depends on the nature of the errors in the original model and the quality of the transformation, and may not always be more efficient than OLS. Choice C is incorrect because GLS can handle binary variables, by using appropriate transformations. Choice D is incorrect because GLS produces different estimates for the coefficients, as well as different standard errors, compared to OLS.

The GLS Estimator