ECON5810: Introduction to Time-Series econometrics, Spring 2024

Preparing for ICT 1

This document is intended to help you with topics while revising for ICT 1
• Revise Seminar problem sets and self guided problem set from week 25
(OLS review).

• PC Lab handouts are important for understanding relevant material from

lectures, BUT you will not need to interpret an R output or use any code for
ICT1!

• The ICT1 test will be based on 10 multiple choice questions. You will need
to pick ONE answer from a-d without providing ANY justification to your
answer.

• Further guidelines on topics relevant from each lecture are shown in detail
below, following from the lecture slides on weeks 25-29.

• The past ICT1s from 2021/22 and 2022/23 (available on moodle) are relevant
to material to be expected in this year’s ICT1, but be aware that in 2021/22
this was run online so the timing will not align to this year’s timed exam
which lasts 45minutes.

• You need to bring your calculator and your Kent ID card with you at the
examination room.

• You need to write down both your name AND exam number.

• Time and venue for the ICT1 on 28/2 are shown in your timetables.

• There will be NO formula sheet available at the exam. Any formula you
may need to know is mentioned explicitly in the revision topics checklist as
shown in this document (see relevant weeks below).

Information for ICT to ALL students:

• Students should promptly attend the room indicated in their personal timetable
as sessions will start as close to on the hour as possible.

• ILP students should take note of the particular instructions given to them
personally by their Division.

• Students should have their ID cards out ready to be placed on their desk.

• Students are required to wait outside the venue and only enter the Hall when
instructed to do so.

• Bags and coats will be allowed in the hall but should be kept tidily at the
back.

• Mobile phones must be turned off and left in bags or coat pockets.

Turn over
 2

• No food or drink allowed in the ICT room except for water in clear bottles or
as specified in a student’s inclusive learning plan (ILP).

Topics Revision Checklist need for ICT2

• weeks 24-25 (Revision of OLS)

– Interpretation of coefficients in SLR/MLR regression model (linear, log-

linear, log-log models.
– Write down a fitted model.
– SST, SSR, SSE, what do they indicate and how to use them to calculate
R2
– You NEED to remember the formula for R2 and how to interpret the R2 .
You don’t need to know the formula for Adjusted R2 .
– SLR/MLR assumptions: what do they mean.
– Biased vs. unbiased estimator(s).
– Omitted variable bias (see relevant example in week 27 with technical
illustration of bias).
– You NEED to know the formula for how to estimate the error variance.
– You do NOT need to know the formulae fob V ar( ˆ1 ), V ar( ˆ2 ),...V ar( ˆj ),
– You NEED to be able to construct a t-test (follow all steps), a confidence
interval and interpret these,
– There WILL NOT BE an F test in the ICT 1 (BUT do not ignore the F
test generally, we will see it in the next few weeks and it may appear in
ICT2 and the final exam).

• week 26

– What isa time series data-set (vs. cross-sectional).

– Lags Yt j , Differences Yt .
– Static vs. Dynamic time series model.
– the finite distributed lag model
– You DO NOT need to know the derivations in slides 19-22 regarding
the dynamic model.
– OLS under assumptions TS1-TS3.
– Contemporaneous exogeneity.
– Assumptions TS4-TS5: what properties of the OLS estimators can we
obtain?
– Hypothesis testing using t-tests (similar to material from week 25)

• week 27
 3

– Spurious correlation: definition, how can this be detected (e.g. looking

at the correlations between two time series variables- see plots in slides)
– Omitted variable bias: ALL information on slide 11.
– Trends: how can we observe these in a time plot?
– Trends and omitted variable bias (see slides 13-14) ALL information of
these slides are important.
-
– Do not focus on the exponential trend.
– When do we include a trend variable in our model (slide 19-20).
– Seasonality: definition, examples, adjusting for seasonality (by using
seasonal dummy variables).

• week 28

– Violation of unbiasedness if strict exogeneity is violated.

– bias vs. consistency (definition).
– Stationarity: strict and weak (covariance stationarity), VERY important
to know what these terms refer to.
– You DON’T NEED to know anything on weak dependence for the ICT
(but you need to do so for the final exam).
0 0
– Assumptions T S1 T S3 : you need to be able to understand these.
– white noise process: definition and properties.
– You DON’T need to know the properties of the MA(1) process for ICT
1 (but you need this for the final exam and ICT2).
– You NEED to know the properties of the AR(1) process
– You can ignore the ARMA(1,1) process for the ICT1.
– Proof of stationarity of a white noise process
– Conditions for stationarity in the AR(1) process, mean for AR(1), variance
of AR(1) (focus on the derivation as in slide 26, you can ignore derivation
using lag operator as in slide 27).
– Unit root process: definition and properties (calculation of mean, variance).
– You can ignore example 4 on slide 30 on ARMA process for the ICT1.

• week 29

– Seminar problem set (discussed during seminar)

– Lecture from week 29 will not be assessed in ICT1, but will be assessed
during ICT2 and final exam.

END
Week 24-25 -Linear model the coefficient represents the
:

Single Linear - Multiple Linear Regression

Regression
e
-
ange inI deadenen a end ener
constant
variables .

y B0
=

+ B, X ,
+BcX2+ PrXx+ 3 ...
, -coefficients 3-error term-Log-linear model
:

interpret the refhelent as the

y dependent vanables Bo-the intercept Xi-independent variable percentage change in the dependent vanable for a one-
unit
change in the independent variable .

I!
Log-log model the coelherent signifes the percentage
:

dependent
R change in the vanables .

Assumptions Linearity Independence

:

↳
, ,

nOMOScedasticity normality of Residuals ,

-
estimators are unblased it , an average meanings assumptions ensure the vehability
the
:

-
os ,

they equal the mee parameter values Blased

of Ols eshmators and validity of statistical
.

estimators systemancally overest ,mare or underestimate

inferences .

imamentarian
Interpretation indicates the proportion of
:

the

vanance In the dependent vanable that is

predictable fram the Independent variables .

I maintains rocam- When

↳
does
-

not imply causaton .

t-test: a relevant variable is not included In the model

-assesses the significance
squares) -Y)2 t1) +B)
SST(Toral Sum of SST < (Y : of Individual cocelent leading to based collient (1
:
=

,
.
e .

SER (Regression Sum of squares) SSR 3 (Yi -y

-2 -condence intervals :
:

True model y t B
=

Bzzt
:

x V=
+
= +

, +

-4i)2
~18 we Ignore
SSECENO Sum of Squares) SSE < (Y : provides a range within model Regression
model
: :

comit)2: wan the y= B , X + +u =

=
:

Nove in the
regression model
:

Ei( - yz
R2 Calculation : R2
+

R
B2 2 +
1- 1st
=

Ut V= which yields
=
+
,
=
the
following =ICC E
=

OLs solution .

52 39T substituting (1)(nto(2) <== , ( +(B

E whe parameter mines -,
,x + Bz2z 1t) +

= . =

[F=/CE

8 4I
n K-1
1 Define the
-

estimates the
:
.

hypotheses. Ho :, =
0? H ,: ; FO =
,
+

z[i 1) 2z t SE 1) Vt
=
+
= =

E , CE =ICC E
variance of the error . 2 .
E-stastic 3 degree of freedom If
.
.
= n-1

Significance level-2-0 .
05 , 0 01 or 0 1
. . 5 .
t-distribution table

6 ·

comparing test statishe with critical value 7 .

fal to reject or reject the
null hypothesis .

confidence interval denoted by

etfs
:choose -
1 -
2

. Obtain the standard ever of the coefficient

2
degrees of medomat=n-K 4 . Formula for confidence internal
.

5 Interpret the results 6 Report the results

. .

cross-sechonal data collected over sample units at

:

--tim
a parncular time penod .

I
earelected
in a finite CFDL model , one
or more variables affect y with a
lag It includes
terms for each
lag up to a finite number
.

.
over discrete intervale of time .

assumes an immediate effect of

Assumption Ts 1 Linear in parameters
changes in the Independent variables
un
-
.

Assumption Ts . 2- noperfect collinearity . on the dependent variable .

Assumption TS 3-zero conditional mean variable t affect Y with a the effect of

dynam model allows one a more
lag incorporating
.

,
OLS estimators are unbiased Conditional on X
:

past values
.

->
assumes that (U-/X=) 0 , indicating that the enerterm
=

at time + is uncorrelated with the

explanally
variables at the same me .

Assumphon TS 4 .
-

homoshedashuty-Ols estimators are still unbiased .

Assumphonis 5- no senal comdation-OLs estimators reman unblased , and their vanances are
.

given by specific formulas .

Sunder
: The value of y in the prevous penod its called its fust lagged value or first lag (y ) - .

Y -; represents the j-th lagged value

Differences 14. first difference of a series representing its change between penods and t-1 , calculated as & Y Y+ Y = -1
:

is the ,
+
=
-

assumphants. , throughts .
6 , 01s isrimators are normally dutributed I-rests.
can be used far hypothes raning and the ,
usual construction of confidence Intervals is valld
 Week 27

I
Observing mends :
linear trend ye Bo + 1 +et :
=

exponental hend y = exp(80+ B t

S
:

,
+

et)
considerations :
->
demend vanables before regression
-

trending dependent vanables may overstate

R2
With -

vanance .

-> Relahonshup : Ignoring trends in the presence of omitted vanables may lead to
spenous relationsup
depending is crucial to obtaining meaning ful results ·

include a hend when :

-

dependent vanable displays

~ a mend .

some or all independent

-

vanables have wends .

Sam
dehnihon occurs when revelant vanable Spurious correlation
:

a is

excluded fram the model .

↳ debuchon : ·
occurs when no vanables appear causally related

impact : Induces bas in parameter estmates but are not .

·

Other due to coincidental a thurd "confounding" factors .

example/wan slide (1) Nue model B Bzz detecton: examune comeations between vanables
:

y=
:

,
x +
+

=
+
=
·
.

Omited vanable model y = B be carhous of high correlations that lack economic

·

reasoning
:

x= u=
=
+
.

resulting Ols solution

:

B= , , +
penodic fluctuation
~

at knam intervals .

examples increased wavers during christmas

:

-higher stock market hansactions on Mondays .

adjusting ser seaschality

:

use seasonal dunny vanables in the model

Slide II 30mited Variable Bas

Slide 13-14 Trend
-suppose the correct model is
given by
True model
yt P x + B2z
:

,
+
=
+

1= -

Nothing about hending vanable necessanly violates Assumphon Ts 1-Ts 6 . .

-is we
Ignore (Cir) 2 : wan the model havever , we must account for wends as if we ignore them , we may and a

and one more explanatory vanable (e g (1)

Regression (tSrimahon) Model y = B = spurious relationship between y or
: .

+ Ue
.
=

, -

in the regression model u, Bcz + x1) which yields the

constants)
Inole
simphaty
that
=

4.
+

OLs solution
-

Suppose (for let +

C =

0 i e no
.
.

Collaring

B, y+ 4t H (3)
the
=
+

,
=

+ Yt x (4)
+

= +

subshtutung (1) into (2)

Wit += 1 , 2 1 3 ,

Be
. . . .
,

, , Bezt+e)
= (B B
e e
+

correlated (i e ., 8) but it regress youse using the

= +

-obviously y and s we
,
are not
=
.

, ,

EFICE
regression .

y+ B x Et
= +

, +

-> substituting (4) Int the OCS Sommon for (5)

If both 4, =U and 0 70 then t (B ]F 0

-
, =

· , ,

·
Kommon) types of hends

① Linear trend
② Exponennal hend

Slide 19-20 -trending vanables :

Same further considerations

·
When should a head be included in our econometric model ?
behaviour
-it the dependent vanable displays an obvious trending
it both the dependent and some independent vanables have mends
I

-
.

-if
only some of the independent vanables have wends their effect
;

on the
dependent vanable may only
be visible after a mead has been subtracted .

with a hie mend :

a delending interpretation of regressions
~

-it hurns out that the ols coefficients in a wend are the same as the coelhesents
regression including a
depended before the
in a
regression without a hend ht where all the vanables have been
regression .

-this rollars from the general interpretation of multiple regressions .

·
Computing R2 When the dependent vanable
is
hending :

-computing Re When the dependent

vanable is mending .

all
due to the mend the vanance of the dependent vanable
and then run the repressin
,

sanables (plus a head in they are wending as well)

the independent .

The Re of this is a more adequate measure of ht

regression
.
 it strict exogeneity violated , unblasedness
is
may be compramsed
·

-> city's murder rate model may face bas if

police force size is adjusted
based on past murder rates .

-> Blas
:

systemate deviation from the n value

-
consistency estimator converges to the me value as sample
:

size graws (n-8] .

strict slahonary : jout distribution is independent

·

I
dennihon : (1 Et , where E-iid (8, 1)
=

properhes : shatonary and meanly dependent of speake time points

weak(covanance) Stahonarity : mean , variante and
> definition : ARCI) process with =1 covariance remain constant over time .

in speches non-stationary extbits a whit

:

rot .

importance : provides stability for

understanding relationsh :

over time

stanonary conditions for ARCI) :

- mean depends
:

on
·

parameters .

·
finite and depends on parameters
vanance : .

↳
conditions 14121 far srahonarity
:

while nolse process :

Stahonary and weakly dependent dehmhon ARCI) process with 0
:

1
ARCI) Process (/01) stabonary and
weakly dependent
=
:

unit root process (ARC1) With 1=1)

Non-stationary properties : Non-stahonary , mean not defined , vanance grows over
:

time .

Linearity and heak dependence) assumes the process is

stationary and weakly dependent
:

is2'(NO perfect colneanty)

:

same as in classical assumphous

iss' (zero conditional mean) : explanatory vanables are contemporaneously exogenous .