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Lecture 3

1.Beginning to work with proper

econometrics software packages

EViews and PcGive

2. Estimators and their properties

Properties of least squares estimators

Maximum likelihood estimation

Monte Carlo studies

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a natural way of fitting a line through a

scatter of points with heavier penalties for

large errors

(earliest use by Gauss in 1801?)

computationally simple

provides an exact analytical solution

desirable properties (given classical

assumptions)

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small sample properties and asymptotic

properties

Gauss-Markov Theorem

(Best Linear Unbiased Estimator)

Mean Square Error (MSE)

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Unbiased estimation of 1

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Gauss-Markov Theorem

Given the classical assumptions,

ordinary least squares (OLS) estimators,

in the class of unbiased linear estimators,

have the minimum variance.

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Efficiency

The GaussMarkov theorem states that, provided that the regression model assumptions

are valid, the OLS estimators are BLUE: best (most efficient) linear (functions of the values

of Y) unbiased estimators of the parameters.

probability density

functions

OLS

other unbiased

estimator

1

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27

probability density

functions

1

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27

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the derivation

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estimation

Given the classical assumptions, the solution to

the problem of maximising the likelihood function

turns out to be equivalent to that obtained

by least squares estimation.

(for more details see Dougherty pages 22-36 and 312-320

and chapter 2 of Kennedy).

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Monte Carlo studies are studies of the properties of estimators or test

procedures based on computer simulation experiments conducted with

artificial data which has been generated from a known data generating

process (d.g.p.)

They are particularly helpful for examining the small sample properties of

different estimators (as opposed to the asymptotic properties which can

usually be established by a combination of statistical theory and

mathematical proof).

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Suppose we could assume a d.g.p. of Yi = 100 + 0.5 Xi + ui

ui ~ N(0,1)

Considering small samples of say size n=30 we could fix a set of 30 X values.

Then using the random number generator of a suitable computer package

we could generate many sets of 30 values of ui

(say the number of replications R = 1000 or even 100000).

Next we use the equation to produce a set of Y values for each set of u values.

Now we can use OLS to regress each set of the Y values on X to obtain

1000 different estimates of the slope coefficient 1.

Now we can then check various claimed properties of OLS estimation such as

expectation = 0.5

variance = (1/x2)

We could also see what happened to the properties if we were, say, to use an

alternative distribution for the u values.

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increased

estimators and tests

increased interest in procedures and tests where the

properties cannot be established by mathematical proof

improved computer power

They can also be helpful in improving a students

understanding of sampling distributions and their

properties.

INEMET [U13783]

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