- Error Term
- A variable in a statistical and/or mathematical model, which is created when the model does not fully represent the actual relationship between the independent variable(s) and the dependent variable. As a result of this incomplete relationship, the error term is the amount at which the equation may differ during empirical analysis.
The error term is also known as the "residual", or the "remainder" term.
An error term essentially means that the model will not be completely accurate, and will result in differing results during real world applications. For example, assume there is a multiple linear regression function that takes the form:
When the actual Y differs from the Y in the model during an empirical test, then the error term will not be equal to 0, which means there are other factors that influence Y.
Investment dictionary. Academic. 2012.
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