National open university of nigeria introduction to econometrics I eco 355

 
4.0 
CONCLUSION 
In this unit we conclude that the normality assumption is one of the most misunderstood 
in all of statistics. In multiple regressions, the assumption requiring a normal distribution 
applies 
only
to the disturbance term, not to the independent variables as is often 
believed. Perhaps the confusion about this assumption derives from difficulty 
understanding what this disturbance term refers to – simply put, it is the random error in 
the relationship between the independent variables and the dependent variable in a 
regression model. Each case in the sample actually has a different random variable 
which encompasses all the ―noise‖ that accounts for differences in the observed and 
predicted values produced by a regression equation, and it is the distribution of this 
disturbance term or noise for all cases in the sample that should be normally distributed. 
5.0 
SUMMARY 
 
In this unit, we must have been able to understand the normality assumption and the 
assumption of normality is just the supposition that the underlying random variable of 
interest is distributed normally, or approximately so. Intuitively, normality may be 
understood as the result of the sum of a large number of independent random events. 

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4.0 
TUTOR MARKED ASSESSMENT EXERCISE 
Critically discuss why we employ Normality assumption. 
7.0 
REFERENCES/FURTHER READINGS 
Gujarat, D. N. (2007) Basic Econometrics, 4
th
Edition, tata Mcgraw – Hill publishing 
company limited, New Delhi. 
Hall, S. G., & Asterion, D. (2011) Applied Econometrics, 2
nd
Edition, Palgrave 
Macmillian, New York city, USA.