Exogeneity is a standard assumption made in regression analysis, and when used in reference to a regression equation tells us that the independent variables X are not dependent on the dependent variable (Y). This does not mean there is no connection; since Y is dependent, it will still depend on the independent variable(s) X and on the error term.

When used to refer to a variable, it means that that particular variable is independent (not affected by) other variables in the system. An exogenous variable is able to influence the system without being influenced by it.

## Types of Exogeneity

There are two main forms of exogeneity, depending on the level of independence shown by the variable.

**Strictly exogenous**means the error term is unrelated to any instance of the variable X; past, present, and future. X is completely unaffected by Y.**Sequentially exogenous**means in which the error term is unrelated to past instances of the variable X. A sequentially exogenous variable is also known as a predetermined variable. X is not affected by past instances of Y; but future instances of X may be affected by current or future instances of Y.

If an equation or variable is neither strictly exogenous nor sequentially exogenous, it is called *endogenous*.

## Example of Strict Exogeneity

Suppose you were modeling how the weather affected the probability of softball practice in a small town in the Midwest. The weather is your independent variable, and it affects the probability of softball practice, your dependent variable. The causal relationship is strictly one way; the probability of softball practice is unable to affect the weather in any way. So weather is an strictly exogenous variable.

## References

- Brooks, Chris. Introductory Econometrics for Finance. Retrieved from https://books.google.com/books?isbn=052169468X on July 8, 2018
- Engle, Robert F., et al. “Exogeneity.” Econometrica, vol. 51, no. 2, 1983, pp. 277–304. JSTOR. Retrieved from www.jstor.org/stable/1911990 on July 8, 2018.
- Fingleton, Bernard. Endogeneity, Exogeneity and instrumental variables. Retrieved from http://www.cantab.net/users/bf100/pdf/iv_slides_fingleton.pdf on July 8, 2018
- Finkel, Steven. Analysis of Panel Data : Dynamic Panel Models and SEM-Econometric Model Integration. University of Gothenburg, 17 June 2015.

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