Professional Documents
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What is Econometrics? The Students Perspective Econometrics is too mathematical; its the reason my best friend isnt majoring in economics The Lecturers Perspective Econometrics allows the measurement and analysis of economic phenomena and the prediction of future economic trends
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What is Econometrics? Historical Context Econometricians wear many different hats Are often criticised for ..using sledgehammers to crack open peanuts while turning a blind eye to data deficiencies and the many questionable assumptions required for the successful application of these techniques (Kennedy,1998: p.2) Econometrics as Art or Science?
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Economic Decisions
To use information effectively: economic theory economic data
economic decisions
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Types of Data Time Series Time series data has a separate observation for
each time period e.g. stock prices Since not a random sample, different problems to consider These problems will be addressed in EC20019
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Number of factors determine performance: Ability Family background Effort Let us look at this from the perspective of ability only and analyse this using a simple bivariate (2 variable) model
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Student Performance
STAGE 1- Statement of Theory /Hypothesis Student Performance Function: Student degree performance is determined by ability
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P = f(A)
In linear form:
(1)
Y = 1 + 2X
where Y = performance and X = ability
(2)
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Y = 1 + 2X + U
(3)
Y = Performance - the dependent variable X = Ability - explanatory variable U = Disturbance (random error) term
For this particular example we have data on year 2 average and final year average
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Student Performance STAGE 4a - Obtaining the data Observed values of Y (yr 3 average) and X (yr 2 average) STAGE 4b Preliminary Data Analysis Descriptive Statistics, graphical charts (initial identification of possible errors: outliers, influential observations and lurking variables)
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Student Performance
Year 3 Average Against Year 2 Average
80
70
60
50
Y e ar 3 Av era ge
40
30
20
10
0 10 20 30 40 50 Year 2 Average 60 70 80 90
What can we say about the relationship between year 3 average and year 2 average? Subjective judgement
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Student Performance STAGE 5a - Estimation of the Parameters Y and X are the variables - known 1, 2 and U are the parameters unknown Estimators versus Estimates
The least squares (OLS) regression line is the line that minimises the sum of square deviations of the data points
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Student Performance
Year 3 Average Against Year 2 Average
80
70
60
50 Y e ar 3 Av era ge
40
30
20
10
0 10 20 30 40 50 Year 2 Average 60 70 80 90
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Student Performance
STAGE 6 - Diagnostic Analysis Is the model correctly specified?
- Correct functional form - Omitted variables (or unnecessary ones)
Student Performance
STAGE 7 - Hypothesis Testing Are the estimates statistically significant? Do they conform with economic theory? STAGE 8 - Forecasting/Prediction For example, predicting the level of performance for a particular ability level. Possible policy implications?
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Student Performance
Excel Regression Output: Bivariate Case
SUMMARY OUTPUT Regression Statistics Multiple R 0.599443 R Square 0.359332 Adjusted R Square 0.356338 Standard Error 4.617821 Observations 216 ANOVA df Regression Residual Total SS MS F Significance F 1 2559.477 2559.477 120.0264807 1.83942E-22 214 4563.393 21.32427 215 7122.87 P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% 4.44707E-21 23.88475288 34.92106 23.88475 34.92106 1.83942E-22 0.441276987 0.6349 0.441277 0.6349
Correlation coefficient
Coefficient of determination
Intercept Y2AV
1 t statistic
P-value
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Student Performance
EViews Regression Output: Bivariate Case
Dependent Variable: Y3AV Method: Least Squares Date: 09/24/05 Time: 20:28 Sample: 1 216 Included observations: 216
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Variable C Y2AV R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat
P-value
Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)
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Econometric model Data Estimation Specification testing and diagnostic testing Is the model adequate? No
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Summary
In this session we have: Outlined what econometrics is all about Outlined the methodology of econometrics and illustrated the process using a simple economic model
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