Introduction to Econometrics

and Operations Research

Dobromi Serwa
Institute of Econometrics

Office hours: Friday 17:00,
Room 219 (building M)

Email: dserwa@sgh.waw.pl
WWW: http://akson.sgh.waw.pl/~dserwa


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Resources
akson.sgh.waw.pl/~dserwa/ex.htm

J. Wooldridge (2009) Introductory
Econometrics. A Modern Approach. South-
Western CENGAGE Learning, 4th edition.

N. Balakrishan, B. Render, R. Stair (2007)
Managerial Decision Modeling with
Spreadsheets, Pearson Prentice Hall.

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Performance Assessment
Final grade:
Exam 80% (20 points)
Exercise classes 20% (5 points)

Limit: 10 points
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Lecture 1
Reading assignments: Wooldridge [Ch. 1, 2, 3,
10]

For the next lecture : Wooldridge [Ch. 4, 6, 7,
9.1]
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What is Econometrics?
Economics
theoretical models
Mathematical statistics
experimental data
Econometrics
non-experimental data
multivariate regression models
applied models


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Econometrics
Estimating parameters of economic models

Testing economic theories & hypotheses

Forecasting & simulating economic variables

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Additional topics
Input-output analysis
macroeconomic model
forecasting & simulations

Operations research
optimization problems
linear programming problems



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Steps in empirical economic analysis
Literature review & hypotheses
Building econometric models
Building datasets
Estimating models
Testing model quality
Applying models
(e.g. testing hypotheses, forecasting)

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Data
Cross-sectional data sets
Time series data sets
Panel (or longitudinal) data sets

Example: how consumption depends on
earnings
Monthly data
Multiple households
Monthly data for multiple households


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Simple regression model
Linear regression:


Dependent, explained, response, predicted
variable (regressand)
Explanatory, control, independent, predictor
variable (regressor)
Random error, disturbance term
Slope parameters + intercept parameter
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Estimating regression models
Many methods available:
Least squares, maximum likelihood, least absolute
deviations, generalized method of moments, etc.

Most popular: Ordinary Least Squares
Minimizing the sum of squared residuals
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Fitted values and residuals
Simple regression:

OLS fits the model to data by minimizing sum of squared residuals
0
2
4
6
8
10
12
14
0 1 2 3 4 5 6 7 8 9
y

x
residual
observed y
predicted y
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Estimation (1)
Regression

Database and matrix notation




1
1
1
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Estimation (2)
Matrix notation




OLS formula

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Example
Time-series data






We try to fit the trend line:

y time
2 1
3 2
5 3
4 4
6 5
4 6
0
1
2
3
4
5
6
7
1 2 3 4 5 6
y

time
fitted trend line
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Example (2)
Matrix notation and formulas
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Assumptions for OLS
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Assumption of OLS (2)
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Properties of OLS
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Possible problems with OLS
Endogeneity of explanatory variables
Multicollinarity of explanatory variables
Missing important variables
Heteroskedasticity of disturbances
Autocorrelation of disturbances
Structural breaks & wrong functional form

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Interpretation of estimates
Partial effects (ceteris paribus)


Intercept - predicted value of y when all
variables equal 0.
Holding other factors fixed (ceteris paribus),
one-unit increase in x translates into
an increase of y by a units (on average!)
causality?

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y x
j j
a
Interpretation
Example:
Survey of 1000 families and their monthly earnings (in
USD) and consumption (in USD).
Estimated model:


Interpreatation
For an average family in this survey, 1 USD increase of
monthly income increases consumption by 70 cents.
An average family in this survey would consume 230 USD
even when there was no income.

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e INCOME CONS 7 . 0 230
Some important statistics
Theoretical values o y


Residual = observed y predicted y


Sum of squared reisiduals (SSR)
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Some important statistics
Variance of the error term


Standard error of the regression



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Precision of estimates
Variance of parameter estimates

and its estimate

Standard deviation of the estimate

where is the j+1 diagonal element of
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1 2 2
) ( )

X X D
1 2 2
) ( )

X X S D
1 , 1
)

j j j
d SE a
1 , 1 j j
d
)

2
D
Precision of estimates (2)
Relative standard deviation of the estimate



t-ratio

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% 100

(
)

(
j
j
j
SE
RSE
a
a
a
)

(
j
j
j
SE
t
a
a
a
Important classifications
Variables
exogenous, endogenous
qualitative, quantitative
current, lagged
Models
time-series, cross-sectional, panel-data
static, dynamic
non-linear, linear (in parameters, in variables)
single-equation, multi-equation
deterministic, stochastic

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