Applied Econometrics

Applied Econometrics
Second edition
Dimitrios Asteriou and Stephen
G. Hall
 Applied Econometrics

INTRODUCTION

1. What is Econometrics?
2. The Stages of Econometric Work

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 Applied Econometrics

What is Econometrics?
Econometrics means measurement (metrics in
greek) in economics.
The importance of applied work in economics is
increasing constantly.
Theory suggests that X affects Y but is this true
or not?
This is the work of the applied econometrician.
 Applied Econometrics

What is Econometrics?
• Examples of problems that may be
tackled by an Econometrician
(a)Modelling long-term relationships among
prices and interest rates.
(b)Examining the effect of inflation in
unemployment rates
(c) Examining the effect of disposable
income on consumption
 Applied Econometrics
What is Econometrics?
• Examples of problems that may be
tackled by an Econometrician
(continued)
(a) Determining the factors that affect GDP
per capita growth
(b) Testing the validity of the CAPM and APT
theories
(c) Forecasting the correlation among the
returns and the stock indices of two
countries.
 Applied Econometrics
The Stages of Applied
Econometric Analysis
Economic Theory

Econometric Model Data

Model Estimation

Specification Testing and Diagnostics

Is the Model Adequate?

No Yes

Test any hypothesis

Use for Predictions and Policy Making

 Applied Econometrics

The Structure of Economic Data

• There are three different types of economic

data

• TIME SERIES
• CROSS SECTIONAL
• PANEL DATA
 Applied Econometrics

The Structure of Economic Data

• Time Series Data
• Examples: GDP, Unemployment, Inflation,
Stock Prices, etc
• Vectors or Columns (like in a spreadsheet)
• Frequencies: Yearly, Bi-annually, Quarterly,
Monthly, Weekly, Daily, Hourly.
• Lots of different values for different time
periods for one country, state, city, market.
 Applied Econometrics

The Structure of Economic Data

• Cross-Sectional Data
• Examples: GDP, Unemployment, Inflation,
Stock Prices, etc.
• Vectors or Rows (like in a spreadsheet)
• Frequencies: Yearly, Bi-annually, Quarterly,
Monthly, Weekly, Daily, Hourly.
• Lots of different values for different countries,
states, cities, markets, but for one time period
only.
 Applied Econometrics
The Structure of Economic Data
• Panel Data
• A combination of time series and cross-sectional data.
• Examples: GDP, Unemployment, Inflation, Stock Prices,
etc.
• Matrices (columns and rows to make an n times m matrix)
• Frequencies: Yearly, Bi-annually, Quarterly, Monthly,
Weekly, Daily, Hourly.
• Lots of different values for different countries, states, cities,
markets, and for different time periods.
 Applied Econometrics
The Structure of Economic
Data - Notation
• Time series: Yt, t=1990, 1991, …, 2012
• Cross-Sectional: Yi, i=1, 2, 3, …, 40
• Panel Data: Yit, i and t defined as above.

• It is common to denote each observation by

the letter t and the total number of
observations by T for time series data, and to
denote each observation by the letter i and the
total number of observations by N for cross-
 The Structure of Economic
Applied Econometrics
Data – Quantitative vs Qualitative

• The data may be quantitative and qualitative.

• Quantitative (e.g. GDP per capita, exchange

rates, stock prices, unemployment rates)

• Qualitative (e.g. Day of the week, gender,

level of education)

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