29 views

Uploaded by tsy0703

Financial Econometrics

- Heck Manet Al
- Ivan Canay
- BS ECON Course Outlines Punjab university
- Harvard Government 2000 Syllabus
- UT Dallas Syllabus for acn6312.001.08f taught by Pamela Rollins (rollins)
- Fingleton Slides Peebles2009
- 44 Malina Wollersheim
- GM533_Course_Project_LastF
- MLVE
- The Influence of Household Income Level on Household Mortality and Life Expectancy in Dodoma Region in Tanzania
- A Study of HRM Practices and Its Impact on Employees Job-related Management Skill in Public Limited Companies
- Nonlinear Regression
- Output From the Program FRONTIER
- Wood, Russell, Macgill, _ Summers 2014.pdf
- Introduction In Econometry
- lec4
- ECO 341K 33755 Syllabus
- Regression & Correlation Assingment 1
- Cs Ks Umurbblr.fix160 Neww
- Vol5_No1

You are on page 1of 31

An Overview of

Regression

Analysis

All rights reserved.

Washington and Lee University

What is Econometrics?

Econometrics literally means economic

measurement

It is the quantitative measurement and

analysis of actual economic and business

phenomenaand so involves:

economic theory

Statistics

Math

observation/data collection

2011 Pearson Addison-Wesley. All

1-2

Three major uses of econometrics:

Describing economic reality

Testing hypotheses about economic theory

Forecasting future economic activity

researcher (YOU!) first asks questions and then

uses econometrics to answer them

1-3

Example

Consider the general and purely theoretical

relationship:

Q = f(P, Ps, Yd)

(1.1)

theoretical relationship to become explicit:

Q = 27.7 0.11P + 0.03Ps + 0.23Yd

2011 Pearson Addison-Wesley. All

(1.2)

1-4

Economic theory can give us the direction of a

change, e.g. the change in the demand for dvds

following a price decrease (or price increase)

But what if we want to know not just how? but also

how much?

Then we need:

A sample of data

A way to estimate such a relationship

one of the most frequently ones used is regression analysis

1-5

(cont.)

Formally, regression analysis is a statistical

technique that attempts to explain

movements in one variable, the dependent

variable, as a function of movements in a set

of other variables, the independent (or

explanatory) variables, through the

quantification of a single equation

2011 Pearson Addison-Wesley. All

1-6

Example

Return to the example from before:

Q = f(P, Ps, Yd)

(1.1)

independent variables

Dont be deceived by the words dependent and independent,

however

A statistically significant regression result does not necessarily imply

causality

We also need:

Economic theory

Common sense

1-7

The simplest example is:

Y = 0 + 1X

(1.3)

0 is the constant or intercept term

1 is the slope coefficient: the amount that Y will

change when X increases by one unit; for a linear model,

1 is constant over the entire function

1-8

Figure 1.1

Graphical Representation of the

Coefficients of the Regression Line

1-9

(cont.)

equation be linearsuch as (1.3)

Y = 0 + 1X2

(1.4)

Z = X2

(1.5)

Y = 0 + 1 Z

(1.6)

is not linear

Substituting into (1.4) yields:

This redefined equation is now linear (in the coefficients 0 and 1

and in the variables Y and Z)

1-10

(cont.)

No, at least four sources of variation in Y other than the variation in the

included Xs:

(e.g., X2 and X3)

Measurement error

of all these other sources of variation in Y that are NOT captured

by X, so that (1.3) becomes:

Y = 0 + 1X +

(1.7)

1-11

(cont.)

Two components in (1.7):

deterministic component (0 + 1X)

stochastic/random component ()

Why deterministic?

Indicates the value of Y that is determined by a given value of X

(which is assumed to be non-stochastic)

Alternatively, the det. comp. can be thought of as the

expected value of Y given Xnamely E(Y|X)i.e. the

mean (or average) value of the Ys associated with a

particular value of X

This is also denoted the conditional expectation (that is,

expectation of Y conditional on X)

1-12

Example: Aggregate

Consumption Function

Aggregate consumption as a function of aggregate income may be

lower (or higher) than it would otherwise have been due to:

consumer uncertaintyhard (impossible?) to measure, i.e. is an

omitted variable

Observed consumption may be different from actual consumption

due to measurement error

The true consumption function may be nonlinear but a linear one is

estimated (see Figure 1.2 for a graphical illustration)

Human behavior always contains some element(s) of pure chance;

unpredictable, i.e. random events may increase or decrease

consumption at any given time

will differ from the Y predicted from the deterministic part, 0 + 1X

1-13

Figure 1.2

Errors Caused by Using a Linear Functional

Form to Model a Nonlinear Relationship

1-14

Include reference to the number of

observations

Single-equation linear case:

Yi = 0 + 1Xi + i (i = 1,2,,N)

(1.10)

observation

the coefficients, 0 and 1, are the same

the values of Y, X, and differ across observations

2011 Pearson Addison-Wesley. All

1-15

The general case: multivariate regression

Yi = 0 + 1X1i + 2X2i + 3X3i + i (i = 1,2,,N) (1.11)

Each of the slope coefficients gives the impact of a one-unit

increase in the corresponding X variable on Y, holding the

other included independent variables constant (i.e., ceteris

paribus)

As an (implicit) consequence of this, the impact of variables

that are not included in the regression are not held

constant (we return to this in Ch. 6)

2011 Pearson Addison-Wesley. All

1-16

Let wages (WAGE) depend on:

years of work experience (EXP)

years of education (EDU)

gender of the worker (GEND: 1 if male, 0 if female)

WAGEi = 0 + 1EXPi + 2EDUi + 3GENDi + i (1.12)

1-17

Indexing Conventions

Subscript i for data on individuals (so called

cross section data)

Subscript t for time series data (e.g., series of

years, months, or daysdaily exchange rates, for

example )

Subscript it when we have both (for example,

panel data)

1-18

Equation

unknowntheoretical regression equation

regression vs. the sample/estimated regression

regression model (1.14)?

It has to be estimated

Yi 0 1 X i

(1.16)

The signs on top of the estimates are denoted hat, so that we have

Y-hat, for example

1-19

Equation (cont.)

For each sample we get a different set of estimated

regression coefficients

Y is the estimated value of Yi (i.e. the dependent

variable for observation i); similarly it is the

prediction of E(Yi|Xi) from the regression equation

The closer Y is to the observed value of Yi, the

better is the fit of the equation

Similarly, the smaller is the estimated error term, ei,

often denoted the residual, the better is the fit

2011 Pearson Addison-Wesley. All

1-20

Equation (cont.)

This can also be seen from the fact that

(1.17)

(1.18)

1-21

Figure 1.3

True and Estimated Regression Lines

1-22

Explain Housing prices

Houses are not homogenous products, like corn or

gold, that have generally known market prices

So, how to appraise a house against a given

asking price?

Yes, its true: many real estate appraisers actually

use regression analysis for this!

Consider specific case: Suppose the asking price

was $230,000

2011 Pearson Addison-Wesley. All

1-23

Explain Housing prices (cont.)

Is this fair / too much /too little?

Depends on size of house (higher size, higher price)

So, collect cross-sectional data on prices

(in thousands of $) and sizes (in square feet)

for, say, 43 houses

Then say this yields the following estimated regression

line:

(1.23)

1-24

Model of Housing Prices

1-25

Explain Housing prices (cont.)

Note that the interpretation of the intercept term

is problematic in this case (well get back to this

later, in Section 7.1.2)

The literal interpretation of the intercept here is the

price of a house with a size of zero square feet

1-26

Explain Housing prices (cont.)

How to use the estimated regression line / estimated

regression coefficients to answer the question?

Just plug the particular size of the house, you are interested in

(here, 1,600 square feet) into (1.23)

Alternatively, read off the estimated price using Figure 1.5

remember!)

So, in terms of our original question, its a good dealgo

ahead and purchase!!

Note that we simplified a lot in this example by assuming that

only size matters for housing prices

1-27

Weight-Guessing Equation

1-28

Weight-Guessing Equation

1-29

Figure 1.4

A Weight-Guessing Equation

1-30

Regression analysis

Slope coefficient

Dependent variable

Multivariate regression

model

Independent (or

explanatory) variable(s)

Expected value

Causality

Residual

Time series

Linear

Intercept term

1-31

- Heck Manet AlUploaded byMd Sifat Khan
- Ivan CanayUploaded bylabeeb8
- BS ECON Course Outlines Punjab universityUploaded byqasim
- Harvard Government 2000 SyllabusUploaded byJ
- UT Dallas Syllabus for acn6312.001.08f taught by Pamela Rollins (rollins)Uploaded byUT Dallas Provost's Technology Group
- Fingleton Slides Peebles2009Uploaded byavcs1
- 44 Malina WollersheimUploaded byW.J. Zondag
- GM533_Course_Project_LastFUploaded byEm Atallah
- MLVEUploaded byHiusze Ng
- The Influence of Household Income Level on Household Mortality and Life Expectancy in Dodoma Region in TanzaniaUploaded byIJSRP ORG
- A Study of HRM Practices and Its Impact on Employees Job-related Management Skill in Public Limited CompaniesUploaded byarcherselevators
- Nonlinear RegressionUploaded bymaracaverik
- Output From the Program FRONTIERUploaded byduput
- Wood, Russell, Macgill, _ Summers 2014.pdfUploaded byatjoeross
- Introduction In EconometryUploaded byBrickaaa
- lec4Uploaded byjuntujuntu
- ECO 341K 33755 SyllabusUploaded byMack Coleman Dowdall
- Regression & Correlation Assingment 1Uploaded byirfanrizvi
- Cs Ks Umurbblr.fix160 NewwUploaded bypene asoy
- Vol5_No1Uploaded byUday Gupta
- 57Uploaded byChipo Chip
- Human and Performance2Uploaded byRsia Kusuma Pradja
- IA St Eco No Metrics 1 Fall 2009Uploaded byBuckyKatt9
- Output yyUploaded byHira Damayanti
- 2007_33_1_3.pdfUploaded byBABYFER_87
- lectureUploaded byPatrick Siqueira da Rocha
- SugarUploaded bysilverjamster
- intro. to Linear Regression-AP-80Uploaded byaaditya01
- Research Critique Res290Uploaded byBryan Yu
- BS2510_Mock_data_handling_questions_from_Dr_BrightUploaded bysusanne_nw

- Related Party Disclosure CRA and Work ProgramUploaded bytsy0703
- IB_PPT_ch1Uploaded bytsy0703
- Chapter12 - Ethics in the Global EnvironmentUploaded bytsy0703
- Chapter1 - Ethics and Its Conceptualization in LifeUploaded bytsy0703
- Chapter 1- Strategic Management EssentialsUploaded bytsy0703
- Topic 5Uploaded bytsy0703
- BE2015 Guidebook 2Uploaded byContenderC
- Arens14e Ch10 Ppt GeUploaded bytsy0703
- Arens14e Ch13 Ppt GeUploaded bytsy0703
- Audit and Assuarance CH7Uploaded bytsy0703
- Arens14e Ch08 Ppt GeUploaded bytsy0703
- Arens14e Ch06 Ppt GeUploaded bytsy0703
- Audit and Assuarance CH5Uploaded bytsy0703
- Audit and Assuarance Ch2Uploaded bytsy0703
- Audit and Assurance Ch1Uploaded bytsy0703
- Chpt 01 NotesUploaded bytsy0703
- Topic 1Uploaded bytsy0703
- Chapter 11 (Financial Management)Uploaded bytsy0703
- Chapter 1 Financial Management (1)Uploaded bytsy0703
- Studenmund_Ch02_v2Uploaded bytsy0703
- Readme PatchUploaded bytsy0703
- 0045099Uploaded bytsy0703
- 天南地北Uploaded bytsy0703
- Uum HE13-14 Final MayUploaded bytsy0703

- 01-Jones-Baumgartner From There to Here Punctuated Equilibrium to TheUploaded byablas97
- 1Uploaded byKartik Desai
- commentary I reflection on dialogical research in therapy supervision doing supervisin as a relational event.pdfUploaded byNoemi Kc Kc
- Presentation on Snowball SamplingUploaded bymandefu chanshi
- Keith, A - Nationality and RaceUploaded bylarsrordam
- Traction System Case Study.pdfUploaded bynpfh
- Knots and Applications by Louis H. KauffmanUploaded byIsrael Babithor Rojas Valgreen
- Nominalization PowerpointUploaded bySofia Lund
- PhrasebookUploaded byFátima
- Mdmsc Nastran 2011 DynamicsUploaded byMichele Mattetti
- Outline Colonial LifeUploaded byAmraam120
- Ishaan Awashti Was an 8 Year Old Who Tended to Be Alone While Creating His Own World by the Aid of His Own Imaginative ConceptUploaded byRaymond Chin
- Peer-Run Crisis RespitesUploaded byJonathan Bates
- SLOKASUploaded byyegneshwaran
- Writing GuidelinesUploaded byAnonymous 2hcpgHxKl
- mean girls analysis x-2Uploaded byapi-354236239
- Sung Compline BookletUploaded byThomas Beyer
- A Project Manager’s Guide to Cost Estimating and Cost PlanningUploaded bysarathirv6
- Anger Part 1Uploaded byAndrés Torres
- Jyotish_Houses 8 and 3 in advanced astrology_KP Horary_Chatterjee.pdfUploaded byprabhas reddy
- 5624_Softskill - NLPUploaded byranny
- MARK CASSON - AN ENTREPRENEURIAL THEORY OF FIRMUploaded byhistoriadors
- For Men Only! - Relationshp Thoughts for Men by MenUploaded byTimothy J. Yancy
- Interviews TipsUploaded bysaipk
- annotated bibliography chase falk gardner the picture of dorian grayUploaded byapi-249361491
- Castoriadis - Philosophy, Politics, AutonomyUploaded byKim Lee
- Tips for You to Pass F1-F3Uploaded byAhmed Harees
- Envestnet Yodlee Interview ExperienceUploaded byPranava Pranu
- Heinrich Schwoerer- Particle acceleration with lasersUploaded byMutrexcz
- E-Book of Supreme Master Ching Hai's Secrets to Effortless Spiritual PracticeUploaded bywisdomdisciple