COLLEGE OF COMMERCE AND BUSINESS ADIMINSTRATION

DEPARTMENT OF MANAGEMENT

ECONOMETRICS GROUP ASSINGMENT FOR FORTH YEAR

MANAGEMENT STUDENTS

GROUP: THREE
GROUP MEMBER ID NO
1. ABRAHAM ARSIBO ------------------------------- 002/12
2. LEGESSE TUSE ----------------------------------- 012/12
3. BELAYNEH SAPHENA ----------------------------006/12
4. BAHIRU YIRDAW ---------------------------------
5. DAWIT EGEDO ------------------------------------
6. ABAYNESH MURTE ------------------------------- 001/12
7. WUDINESH YAIKOB ------------------------------- 019/12

Submitted to Mr.Mamaru S.

Submission date: 6.May.2023 Sawla. Ethiopia

1. Distinguish the following model with neat and clear explanation

A ’static model vs. dynamic model

A static model is trained offline. That is, we train the model exactly once and then use that trained
model for a while. A dynamic model is trained online. That is, data is continually entering the system
and we're incorporating that data into the model through continuous updates.

While a dynamic model refers to runtime model of the system, static model is the model of
the system not during runtime. Another difference lies in the use of differential equations in
dynamic model which are conspicuous by their absence in static model. Dynamic models
keep changing with reference to time whereas static models are at equilibrium of in a steady
state.

Static model is more structural than behavioral while dynamic model is a representation of
the behavior of the static components of the system. Static modeling includes class diagram
and object diagrams and help in depicting static constituents of the system. Dynamic
modeling on the other hand consists of sequence of operations, state changes, activities,
interactions and memory.

Static modeling is more rigid than dynamic modeling as it is a time independent view of a
system. It cannot be changed in real time and this is why it is referred to as static modeling.
Dynamic modeling is flexible as it can change with time as it shows what an object does with
many possibilities that might arise in time.

B ‘Econometric vs economic model

Economic models are qualitative but by nature, they are based on mathematical models as
they ignore residual variables

An economic model is a simplified version of reality that allows us to observe, understand,

and make predictions about economic behavior. The purpose of a model is to take a complex,
real-world situation and pare it down to the essentials. If designed well, a model can give the
analyst a better understanding of the situation and any related problems.

Econometric models are extensively statistical or future forecast oriented Econometric

models are statistical models used in econometrics.

An econometric model specifies the statistical relationship that is believed to hold between
the various economic quantities pertaining to a particular economic phenomenon.

The most common econometric models are structural, in that they convey causal
and counterfactual information,[2] and are used for policy evaluation. For example, an
equation modeling consumption spending based on income could be used to see what

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consumption would be contingent on any of various hypothetical levels of income, only one
of which (depending on the choice of a fiscal policy) will end up actually occurring.

C. mathematical vs. econometric model

Econometric model deals with the use of statistical and mathematical tools to analyze trends
and predict future outcomes economics involves the application.

An econometric model specifies the statistical relationship that is believed to hold between
the various economic quantities pertaining to a particular economic phenomenon.

Mathematical model is an abstract description of a concrete system using mathematical

concepts and language. The process of developing a mathematical model is termed
mathematical modeling.
Mathematical models can take many forms, including dynamical systems, statistical
models, differential equations, or game theoretic models. These and other types of models
can overlap, with a given model involving a variety of abstract structures. In general,
mathematical models may include logical models.
In many cases, the quality of a scientific field depends on how well the mathematical models
developed on the theoretical side agree with results of repeatable experiments. Lack of
agreement between theoretical mathematical models and experimental measurements often
leads to important advances as better theories are developed.
D “Algebraic vs geometric
Algebraic models are a format of defining real-world problems in the context of algebra using
variables to express measurements. Learn to create different types of algebraic models
through examples of problems turned into equations

The general algebraic modeling system (GAMS) is a high-level modeling system for
mathematical optimization. GAMS are designed for modeling and solving linear, nonlinear,
and mixed-integer optimization problems.

Geometric modeling is a branch of applied mathematics and computational geometry that

studies methods and algorithms for the mathematical description of shapes. The shapes
studied in geometric modeling are mostly two or three dimensional (solid figures), although
many of its tools and principles can be applied to sets of any finite dimension. Today most
geometric modeling is done with computers and for computer-based applications.

E. verbal / logical vs physical model

Logic / verbal/ models are hypothesized descriptions of the chain of causes and effects leading to
an outcome of interest Logic models are used by planners, funders, managers and evaluators of
programs and interventions to plan, communicate, implement and evaluate them.

They are being employed as well by health scientific community to organize and conduct literature
reviews such as systematic reviews. Domains of application are various.

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e.g. waste management, poultry inspection, business education heart disease and stroke
prevention Since they are used in various contexts and for different purposes, their typical
components and levels of complexity varies in literature (compare for example the W.K.
Kellogg Foundation[ presentation of logic model, mainly aimed for evaluation, and the
numerous types of logic models in the intervention mapping framework).

In addition, depending on the purpose of the logic model, elements depicted and the
relationships between them is more or less detailed.

physical model
(Most commonly referred to simply as a model but in this context distinguished from a conceptual
model) is a smaller or larger physical copy of an object. The object being modeled may be small
(for example, an atom) or large (for example the solar system.

Physical models allow visualization, from examining the model, of information about the thing the
model represents. A model can be a physical object such as an architectural model of a building. Uses
of an architectural model include visualization of internal relationships within the structure or external
relationships of the structure to the environment. Other uses of models in this sense.

2. discuses briefly the OLS assumption in multiple regression model?

Multiple linear regression models

Is a statistical method we can use to understand the relationship between multiple predictors
varied a response variable. We must first make sure that five assumptions are methods.

1. Linear relationship:
There exists a linear relationship between each predictor variable and the response variable.
A linear relationship (or linear association) is a statistical term used to describe a straight-
line relationship between two variables. Linear relationships can be expressed either in a
graphical format or as a mathematical equation of the form y = mx + b. Linear relationships
are fairly common in daily life.

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2. No Multicollinearity:
None of the predictor variables are highly correlated with each other.
Multiple linear regressions assume that none of the predictor variables are highly correlated
with each other.

When one or more predictor variables are highly correlated, the regression model suffers
from multicollinearity, which causes the coefficient estimates in the model to become
unreliable.

3. Independence:

The observations are independent.

Depending on the nature of the way this assumption is violated, you have a few options:

 For positive serial correlation, consider adding lags of the dependent and/or independent
variable to the model.
 For negative serial correlation, check to make sure that none of your variables are over
differenced.
 For seasonal correlation, consider adding seasonal dummy variables to the model.
 Homoscedasticity: The residuals have constant variance at every point in the linear
model.
Multiple linear regressions assume that the residuals have constant variance at every point in
the linear model. When this is not the case, the residuals are said to suffer
from heteroscedasticity.

4. Multivariate Normality:

The residuals of the model are normally distributed.

Multiple linear regressions assume that the residuals of the model are normally distributed.
If one or more of these assumptions are violated, then the results of the multiple linear
regressions may be unreliable.

3. What are the properties that make value the OLS estimator BLUE?
Blue stands for best, linear, unbiased, estimator. Best stands for the estimator with the
minimum variance. Linear because it is a linear combination of error of terms. Unbiased
because the center of the distribution of our estimator b is exactly equal to the true.

The Gauss Markov Theorem, which guarantees that the Ordinary Least Squares method
under certain conditions. They are colloquially referred to as the Gauss Markov Assumptions.
It is important to note that the first four ensure the biasedness of the linear estimator, while
the last one preserves the lowest variance

1. Linearity in Parameters
2. Random Sampling

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 3. No PerfectCollinearity
4. Erogeneity
5. Homoscedasticity

4. what are the basic techniques of identifying multi colinearity problem

?
Multicollinearity can affect any regression model with more than one predictor. It occurs
when two or more predictor variables overlap so much in what they measure that their effects
are indistinguishable.

Seven more ways to detect multicollinearity

1. Very high standard errors for regression coefficients

When standard errors are orders of magnitude higher than their coefficients, that’s an
indicator.

2. The overall model is significant, but none of the coefficients are

Remember that a p-value for a coefficient tests whether the unique effect of that predictor on
Y is zero. If all predictors overlap in what they measure, there is little unique effect, even if
the predictors as a group have an effect on Y.

3. Large changes in coefficients when adding predictors

If the predictors are completely independent of each other, their coefficients won’t change at
all when you add or remove one. But the more they overlap, the more drastically their
coefficients will change.

4. Coefficients have signs opposite what you’d expect from theory

Be careful here as you don’t want to disregard an unexpected finding as problematic. Not all
effects opposite theory indicate a problem with the model. That said, it could be
multicollinearity and warrants taking a second look at other indicators.

5. Coefficients on different samples are wildly different

If you have a large enough sample, split the sample in half and run the model separately on
each half. Wildly different coefficients in the two models could be a sign of multicollinearity.

6. High Variance Inflation Factor (VIF) and Low Tolerance

These two useful statistics are reciprocals of each other. So either a high VIF or a low
tolerance is indicative of multicollinearity. VIF is a direct measure of how much the variance
of the coefficient (i.e. its standard error) is being inflated due to multicollinearity.

7. High Condition Indices

Condition indices are a bit strange. The basic idea is to run a Principal Components Analysis
on all predictors. If they have a lot of shared information, the first Principal Component will

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be much higher than the last. Their ratio, the Condition Index, will be high if multicollinearity
is present.

5. Write the possible causes for hetroscedasticity problem with its

appropriate solutions?

1. Simple transformation of the variables an easy way to obtain homoscedastic errors is to

come up with a simple transformation of the variables. Let’s revisit the estimation of
Equation 8.9, but this time with a simple logarithm transformation of wages, log wage = β1
+β2educ+u). The Gretl regression output is log wage d = 5.97306 (0.081374) +0.0598392
(0.0059631)

Educe N = 935 R¯ 2 = 0.0964 F(1,933)

= 100.70 σˆ = 0.40032

2. Weighted Least Squares we want to estimate the following regression model Y = β1

+β2X2 +β3X3 +•••+βKXK +u,) but the errors u are heteroscedastic.

When one is willing to assume that the heteroscedasticity appears as some function of X2,
X3, ..., XK, one can use Weighted Least Squares (WLS) to obtain homoscedastic errors.
Let’s say that the variance of u can be approximated.

3. Weighted Least Squares in Gretl Consider the following model save = β1 +β2inc+u (where
save is savings and Inc is income.

The Gretl output is Model 1: OLS, using observations 1-100 Dependent variable

: save coefficient std. error t-ratio p-value

Coast 124.842 655.393 0.1905 0.8493

inc 0.146628 0.0575488 2.548 0.0124 **

Mean dependent vary 1582.51 S.D. dependent vary 3284.902 Sum squared reside

1.00e+09 S.E. of regression 3197.415 R-squared

0.062127

Adjusted R-squared 0.052557 F(1, 98) 6.491778 P-value(F) 0.012391

Log-likelihood -947.8935 Akaike criterion 1899.787

Schwarz criterion 1904.997 Hanna-Quinn 1901.896

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6. Define what do you mean by random walk with drift and without drift?

Random walk with drift for a random walk with drift, the best forecast of tomorrow's price is
today's price plus a drift term.

One could think of the drift as measuring a trend in the price (perhaps reflecting long-term
inflation). Given the drift is usually assumed to be constant.

Yt= delta + yt -1 where delta known as parameter E (yt)=yo

The random-walk-without-drift model would be model without constant =

Differenced first-order autoregressive model: If the errors of a random walk model are auto
correlated, perhaps the problem can be fixed by adding one lag of the dependent variable to
the prediction equation.

Then the series Yt is said to be random walk if Yt =yt -1 +ut AR.

7. Give neat and clear definition for stationary, weak stationery strict
stationery trend stationery difference stationery non stationary

Stationary is an assumption underlying many statistical procedures used in time series

analysis, non-stationary data are often transformed to become stationary. The most common
cause of violation of stationery is a trend in the mean,

What is weak stationery? Second-order stationery (also called weak stationery) time series
have a constant mean, variance and an auto covariance that doesn’t change with time. Other
statistics in the system are free to change over time. This constrained version of strict
stationary is very common.

What is strict stationery?

A time series {Xt} is called strictly stationary if the random vec-tors (Xt1,...,Xtn) T and (X
t1+τ,...,Xtn+τ) T have the same joint distribution for all sets of indices {t1,...,tn} and for all
integers τ and n > 0. It is written as (Xt1,...,Xtn) T = (d X t1+τ,...,Xtn+τ) T, where =d

What is trend stationery trend-stationary process is a stochastic process from which an

underlying trend (function solely of time) can be removed, leaving a stationary process.[1]
The trend does not have to be linear.

What is difference stationery

Stationary is an adjective described to use a person, object or situation that isn’t moving or
changing, while stationery is a noun used to describe a collection of office items such as
envelopes, papers and cards.

What is non stationery

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A non-stationary signal is when the fundamental assumptions defining a stationary call are no
longer valid. The sine wave representation of a non-stationary equation is hence constantly
changing. The spectral contents for such signals are also not constant.

8. Discuss briefly major criticizes of linear probability model ?

Linear probability model (LPM) is a special case of a binary regression model.

Here the dependent variable for each observation takes values which are either 0 or 1. The
probability of observing a 0 or 1 in any one case is treated as depending on one or more
explanatory variables.

For the "linear probability model", this relationship is a particularly simple one, and allows
the model to be fitted by linear regression.

This method is a general device to obtain a conditional probability model of a binary

variable: if we assume that the distribution of the error term is Logistic, we obtain the logit
model,

While if we assume that it is the Norma.

9. Clearly explained the difference between log it and probity binary

model ?

Logit is definitely better in the case of "extreme independent variables". These are
independent variables where one particularly large or small value will overwhelmingly often
determine whether the dependent variable is a 0 or a 1, overriding the effects of most other
variables.

An extreme independent variable level involves the confluence of three events. First, an
extreme independent variable level occurs at the upper or lower extreme of an independent
variable. For example, say the independent variable x were to take on the values 1, 2, and 3.2.
The extreme independent variable level would involve the values at x = 3.2 (or x = 1).
Second, a substantial proportion (e.g., 60%) of the total n must be at this level. Third, the
probability of success at this level should itself be extrem

aprobit model is a type of regression where the dependent variable can take only two values,
for example married or not married. The word is a poThpurpose of the model is to estimate
the probability that an observation with particular characteristics will fall into a specific one
of the categories; moreover, classifying observations based on their predicted probabilities is
a type of binary classification model.

• Probit is better in the case of "random effects models" with moderate or large sampling
sizes (it is equal to logit for small sample sizes). For fixed effects models, probit and logit are
equally good. I don't really understand what Hahn and Soyer mean by "random effects
models" in their article. Although many definitions are offered. But since logit is never
superior to probity in this regard, the point is rendered moot by simply choosing probity.

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10. Economic theory postulates exact relationships between economic
variables. Consider the following economic relationships. Demand
function: D =β0 – β1P + β2Y

Where D = quantity demand; P = price; Y = income Supply functions=β+β2Pxβ3PfWhere

Sx= quantity supplied;

PX= price; Pf= price of factor inputs Consumption function: C =β1+β2Where C =

consumption expenditure; Y = disposable income Cost function: C =β1+β2Where C = total
cost; X = total output

(I) What is the meaning of exact relationships?

(II) What is the economic meaning of the coefficients (β0, β1, β2, etc.) in each one of the
above relationships?
(III) What would you expect the sign (and magnitude) of the coefficients (?’s) To be in
each of the above cases

Explanations:
(I) In the demand function both price income have inverse relationship. Because when
price increase income decrease and also the slope demand function downward.
(II) The economic meaning of coefficient is the coefficient both price and income (- b1
and b2), that is the coefficient of price is negative and the coefficient of income is
positive.
(III) The sign negative because both of them have negative or inverse relationship.\
11. Suppose we have a data on wheat yield(Y), amount of fertilizer applied (x1),amount of
rainfall(x2).It is assumed that the fluctuation in yield can be explained by varying level of
rainfall and fertilizer. A researcher has obtained the following summarized data.

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 b1 = ((16500) (400)) – ((600) (7000)) / ((280000) (400) – (49000000)

b1 = 0.0381

b2 = ((600) (280000) – (16500)(7000)) / ((280000)(400) – (49000000)

b2 = 0.833

= 60/7 = 8.57

x̄1= Σx1/n = 400/7 = 57.14

x̄2 = Σx2/n = 20/7 = 2.86

There for b0 = 8.57 – (0.0381) (57.14) – (0.833) (2.86)

b0 = 8.57 – 2.177 – 2.38238 = 4.01

b0 = 4.01

B. ȳ = 4.01 + 0.0381x1 + 0.833x2

C.

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The 95% confidence interval for the parameters

INTERPRETATION; 98% the variation in yield is due to the regression plane.

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•

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