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Oct 01, 2016

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By Kaoru Yamaguchi

What is Econometrics

The social science in which the tools of economic

theory, mathematics, and statistical inference are

applied to the analysis of economic phenomena (Arthur

S. Goldberger)

The result of a certain outlook on the role of

economics, consists of the application of mathematical

statistics to economic data to lend empirical support to

the models constructed by mathematical economics and

to obtain numerical results (P.A.Samuelson)

How do we apply Econometrics to

Energy Economics

Essentials of Methodology

Review of Basic Statistical Concepts

Essentials of Linear Regression Model

Essentials of Methodology

Statement of theory or hypothesis

Specification of the mathematical model

Specification of the statistical or econometric

model

Collection of data

Estimation of the parameters of the chosen

econometric model

Tests of the hypothesis derived from the model

Forecasting

Economic Theory

Econometric Model

Estimation

Specification testing

and diagnostic

checking

NO

Is the model

adequate?

YES

Hypotheses tests

1. Economic Data

2. Energy Demand Data

3. Energy Supply Data

Quantity

90

80

70

60

50

40

30

20

10

0

10

Demand

Supply

Examples:

20

30

Price

40

Demand decreases

as price increases

Supply increases as

price increases

Energy demand

increases as GDP

increases

model

1. Linear Model:

Q=b0 + b1 * P

2. Non-Linear (Log-Linear) Model:

Q=b0 * P^b1

Log(Q)=Log(b0) + b1*Log(P)

Specification of Statistical or

Econometric Model

1. Linear Model:

Q=b0 + b1 * P + u

2. Non-Linear (Log-Linear) Model:

Q=b0 * P^b1 * u

Log(Q)=Log(b0) + b1*Log(P) + u

Collection of Data

Time Series

Cross-Sectional

Pooled Data

data

Panel data: Same samples surveyed over time

Estimation of Parameters

1. Linear Model:

Q=B0 + B1 * P

2. Non-Linear (Log-Linear) Model:

Q=B0 * P^B1

Log(Q)=Log(B0) + B1*Log(P)

Coefficient of the Price:

B1 < 0 ?

Q u an tity

Forecasting

90

80

70

60

50

40

30

20

10

0

10

Demand

Supply

20

30

Price

40

Probability distribution function

Normal distribution and t-distribution

Estimator and the property of BLUE

Function

Example: Binominal Probability Distribution: p(y)=n!/(y!(n-y)!)*0.5^n

0.5

n=2

0.25

0.2

Probability

Probability

0.4

n=10

0.3

0.2

0.1

0.15

0.1

0.05

0

0

1

Event

Event

10

Normal Distribution

X

Normal distribution is a model for a

continuous random variable whose value

depends on a number of factors.

Mean value Xi/n=

Sample Variance Xi)2/(n-1)=

X

The t-Distribution

significance of coefficients

(b1-B1)/se(b1) tn-2

Normal Distribution

= Variance

Degree of Freedom d.f.:

The number of independent observations

available to compute a quantity

t20

t5

Desirable Property of

Estimator

The sample mean is the most frequently

used measure of the population mean

because of the following property.

Linearity

Unbiasedness

Efficiency

Best linear unbiased estimater (BLUE)

Linearity

An estimator is a linear estimator if it

is a linear function of the sample

observation.

EX. Sample mean=

(X1+X2+.+Xn)/n

Unbiasedness

UnBiased:E(X)=

Biased: E(X)<>

Efficiency

Efficient:E(X)=

Inefficient: E(X)=

(BLUE)

If the estimator is linear, is unbiased,

and has a minimum variance (most

efficient)

The meaning of regression

of the relationship between one variable called

explained, or dependent variable and one or

more other variable called independent, or

explanatory variable.

Yi = B0 + B1 * Xi + ui

Regression Coefficients

Dependent variable

Independent variable

To estimate the mean value of the dependent

variable, given the values of independent variabls.

To test hypotheses.

To predict or forecast the mean value of the

dependent variable, given the values of

independent variables.

Notes: Estimated relationship does not imply

causation.

Whole Population

(Yi, Xi)

Sample Population

PRF: Population

Yi = B0 + B1* Xi + ui

Regression Function

SRF: Sample

Yi = b0 + b1* Xi + ei

Regression Function

Linearity in the variable

Y=B1+B2X2

Y=B1+B2/X

Y=B1+B22X

Estimation of Parameters

The Method of Ordinary Least

Square (OLS)

Yi = b0 + b1* Xi + ei

80

Quantity

Estimate parameters to

minimize Residual

Sum of Square (RSS =

ei2)

e4

e3

60

e2

40

e1

20

0

10

20

30

Price

40

Model

Regression model based on the

assumptions;

not correlated

The variance of each ui is constant

var(ui)=

terms.

Regression in Practice

Violation of Assumptions

Multicollinearity

Heteroscedasticity

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