University of Tartu

Econometric Analysis
2017-18
Exercises
Lecturer: M. Hakan Eratalay

24/11/2017

Question 1.
Suppose that we have random variables z, y and x such that:

E(z) = 30 V ar(z) =?
E(y) =? V ar(y) = 50
E(zy) = 1500
x=z y
E(x) = 5 V ar(x) =?
E(x2 ) = 80 Cov(z; y) =?

Fill in the missing points marked with "?". Also, …nd the linear projection of x on y:

Question 2.
Comment in detail in each of the following cases if OLS estimator is unbiased, if OLS
estimator is BLUE (best linear unbiased estimator) and if we can use the t-statistic t ^ j =
^
^2
j j
se( ^ j )
where se( ^ ) = SSTj (1 Rj2 )
to test the signi…cance of the coe¢ cients:
a) When there is correlation between some regressors.
b) When there one regressor is a linear function of other regressors.
c) When we can’t …nd data on one relevant regressor, so we don’t include that regressor
to equation.’
d) When we think that a variable is relevant, but actually it is not in the population
model.
e) When population model has an intercept, but we estimate a regression through origin.

1
 f) When the error variance depends on one or more of the regressors.

Question 3.
Suppose that we want to test the rationality of the assessment of housing prices.
a) In the simple regression model

price = 0 + 1 assess +u

where price is the price of a house and assess is its assessed price and both are in
thousands of dollars. The assessment is rational if 0 = 0 and 1 = 1. The estimated
equation is given by:

[ =
price 12:95 + 0:886assess
(14:23) (0:085)

n = 94; SSR = 144; 323:88; R2 = 0:871

where the numbers in paranthesis are the standard errors of corresponding parameter
estimates. First test the null hypothesis H0 : 0 = 0 against a two sided alternative. Then
test the null hypothesis that H0 : 1 = 1 against a two sided alternative. What is your
conclusion?
b) Imagine that the true model was

price = 0 + 1 assess + 2 sqrf t +u

where sqrf t is the usable area in the house in square feets. We estimated the model in
part (a). We know that this leads to omitted variable bias. Comment on the direction of the
bias. (Hint: What would be the expected sign of 2 ? What kind of relation is there between
assess and sqrf t?)
c) To test the joint hypothesis: H0 : 0 = 0 and 1 = 1 in the model of part (a), we need
the SSR of the restricted model. Under the null hypothesis, this corresponds to computing
Pn
i=1 (pricei assessi )2 where n = 94. (Notice that u^i = pricei assessi under the null):It
is given that SSR = 208; 349:11. Carry out the F-test to test this joint hypothesis.
d) Imagine now that we have the model:

price = 0 + 1 assess + 2 sqrf t + 3 lotsize + 4 bdrms +u

where we regress the price of house on the assessment value of a house assess, on the
usable area in the house sqrf t, the total area the house occupies lotsize and the number of
bedrooms bdrms: Test the joint null hypothesis: H0 : 2 = 3 = 4 = 0. The R2 from this
mode using same n = 94 houses is 0:896:

2
 e) Explain what it would mean that the error term is heteroscedastic in this model. How
would that a¤ect the test in part (c)?
f) We would expect that the assessment value of a house assess depends on the usable
area in the house sqrf t, the total area the house occupies lotsize and the number of bedrooms
bdrms. What is this problem called? How does this a¤ect the t and F tests you performed
in part (a) and part (c).

Question 4.
Here is the Stata regression output of a multiple linear regression estimated by OLS. As
you can see some results are missing and they are marked with "?". Fill in these missing
points. Show your calculations explicitly.

a) Are the coe¢ cients signi…cant at 5%? At 1%?

b) Are the coe¢ cients of the explanatory variables jointly signi…cant at 5%? At 1%?
State the null hypothesis in this case.
c) What percentage of the total variation in y is explained by these explanatory variables?

Question 5.
Consider the multiple regression model:

y= 0 + 1 x1 + 2 x2 + 3 x3 +u

We want to test the null hypothesis that H0 : 1 2 2 = 1:

a) Let ^ 1 and ^ 2 be the OLS estimators of 1 and 2 . Write V ar( ^ 1 2 ^ 2 ) in terms of
the variances and covariances of ^ 1 and ^ 2 .
b) Write the t statistic for testing H0 : 1 2 2 = 1: Specify clearly what is in the
numerator and denominator of the t-statistic.

3
 c) De…ne a new parameter 1 = 1 2 2 such that ^1 = ^ 1 2 ^ 2 . Rewrite the model in
a new form which has coe¢ cients 0 ; 1 ; 2 and 3 that would allow you to directly obtain
^1 and its standard error.

Question 6.
In the multiple regression equation:

y= 0 + 1 x1 + 2 x2 + 3 x3 +u

explain clearly and in detail how you will test the joint hypothesis:

H0 : 1 = 2 and 3 =1

In particular specify clearly the alternative hypothesis, the test statistic and its distribu-
tion and the degrees of freedom. Under which assumptions this hypothesis test (and relevant
test statistic) would be valid?

Question 7.
The model
y= 0 + 1 x1 + 2 x2 + 3 x3 +u
is estimated by ordinary least squares with 26 observations. The results were:

y^ = 2 + 3:5 x1 0:7 x2 + 2:0 x3

(1:9) (2:2) (1:5)

where t-ratios are given in the paranthesis and R2 = 0:982: The same model was estimated
with the restriction 1 = 2 and the results were:

y^ = 1:5 + 3 (x1 + x2 ) 0:6 x3

(2:7) (2:4)

where R2 = 0:876:
a) Is the coe¢ cient of x1 + x2 signi…cant in the second regression results? What does this
say about the null hypothesis H0 : 1 = 2 ?
a) Test the null hypothesis H0 : 1 = 2 at 5%.
b) Suppose we drop x2 from the model. Would R2 rise or fall?