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ECONOMETRIC METHODS-I HOME WORK 01 FALL 2011

NOTE: Provide detailed answers to all questions, also there will be a QUIZ on this material on WED.

Note: For question 1 to 5, you can take help from Gujrati book. 1. What is econometrics? Give its types and explain briefly the steps involved in conventional econometric methodology. 2. Explain briefly different types of Data with examples. 3. What is a regression model? Write general form of a simple linear regression model and clearly indicate its parameters Consider a simple linear regression model, Yt = 1 + 2 X t + t ,
2 where, , t ~ N 0, , t = 1, 2,..., T .

The following questions are related to simple linear regression model given above: 4. Explain assumptions of simple linear regression model given above. 5. What is the significance of error term in a regression model. OR explain why error term is present in a regression model?

6. Find parameters of simple linear regression model using ordinary least squares (OLS) method. ^ ^ i.e. find 1 and 2 .
^ 7. Give expressions for the variances of OLS estimates, i.e. V 1

Cov ( 1^ , 2^ ) .

( )

^ and V 2 , also calculate

( )

8. Give an estimate of variance of error term. i.e. find ^2 . Consider a multiple linear regression model

Yt = 1 + 2 X 2t + 3 X 3t + ... + k X kt + t , where, , t ~ N ( 0, 2 ) , t = 1, 2,..., T


9. Write the above regression model in matrix form given below:

Y = X + , where, ~ N ( 0, 2 IT ) , where IT is identity matrix of order T.


Clearly state the dimensions (orders) of Y, X, and . Also indicate parameters of this regression model. The following questions are related to multiple linear regression model given in question #9 above:

10. Explain all assumptions involved in regression model given in Q#9. (SEE APPENDIX OF GUJRATI TO ANSWER THIS QUESTION). 11. OR 12. OR Find parameters of regression model given in Q#9 using OLS method. i.e. calculate ^ . Prove that ^ = ( X ' X )
1

X 'Y

^ Find variance-covariance matrix of OLS estimates, i.e calculate Cov . ^ 2 Prove that Cov = ( X ' X )

( )

( )

13. Given the following data set:

Y 23 45 21 26 42 13 14 34 25 41

X 42 13 23 34 54 21 42 33 18 29

Suppose we want to predict income using education, i.e we want to construct the following regression model,

Yt = 1 + 2 X t + t
2 where, t ~ N 0, , t = 1, 2,..., T .

Where, Y is income of all individuals X is education of the same individuals.

a. Estimate parameters of this regression model ( 1 and 2 ) using formula obtained in Q#6.
^ ^

Suppose we write the regression model in matrix form as follows:

Y = X + , where, ~ N ( 0, 2 IT )
b. Estimate parameter ( ^ ) of this regression model using formula obtained in Q#11. c. Compare the results obtained in Q# 6 and Q# 11. (Note: they must be same).
^ ^ ^ ^ ^ d. Estimated regression model is: Yt = 1 + 2 X t (put values of 1 and 2 to get your regression line).

e. Calulate 2 by using the relation, 2 =


f. Calculate covariance matrix
1

e
t =1

2 t

T 2

e 'e . T 2
(^) by using the relation,

of

OLS

estimate

Cov ( ^ ) = ^2 ( X ' X ) , where, ^2 =


^ g. Calculate V 1

e 'e T 2

( ) ( )

^ and V 2

( )

^ by selecting diagonal entries of Cov calculated in part

( )

(e) above.
^ ^ h. Calculate SE 1 and SE 2 .

( )

14. 15. 16. 17.

Interpret slope and intercept of your estimated regression model given in part (d) above. Test null hypothesis that H 0 : 1 = 0 . Test null hypothesis that H 0 : 2 = 0 . What is coefficient of determination (R2). Give its formula.

18. State and prove Gauss Markov Theorem in the context of regression model given in Q# 9 above. OR Prove that OLS estimates are BLUE.