GMM regression vs OLS regression?
In: Mathematics
OLS takes a bunch of points in N-dimensional space (1 dimension for each factor plus one for the result) and finds a line that gets as close to hitting those points as possible.
The results of OLS also give you some other information about your data (how distributed it is, how likely that the actual line is just flat, etc.)
But in order for those results (and even the line itself) to be correct we have to satisfy certain assumptions about the data. These are called the Gauss-Markov assumptions.
Those assumptions are pretty easy to make true when you’re running a double blind experiment. Unfortunately there are many types of research where double blind trials are unethical, impractical or both. These are basically the observational sciences, particularly social sciences (including economics).
To make up for this we’ve come up with a bunch of techniques for when any given G-M assumption isn’t met. GMM is one of those techniques.
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