Eviews-4

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 Variables (Relevant):
Consumption, investment, imports, stock building, or unemployment)

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Database: Paul Turner’s Online Database
http://runbasichosting.com:8021/seaside/go/runbasicpersonal?app=database

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Choose Variable & Country , and paste on
Excel

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 Log Transformation
Model Type Equation What is beta Interpretation of beta
Linear-Linear Unit change If X goes up by one unit Y goes up by units
Log-Log Elasticity If X goes up by one percent, Y goes up by
percent
Log-Linear Semi-elasticity If X goes up by one unit, Y goes up by
percent
Linear-Log Semi-elasticity If X goes up by one percent, Y goes up by
unit

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 Calculating rates of change i.e. inflation
rate

• Approximate Growth rate:

• Actual Growth rate (Basic growth rate, year by year)

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Assumption of the Classical Linear Regression
(BLUE)
1. The model is linear in its parameters and it is
correctly specified
2. Errors are not correlated with each other (i.e.
no autocorrelation)
3. The errors are homoscedastic (i.e. variance is
constant)
4. All independent variables are uncorrelated
with the error term
5. The error terms are normally distributed and
have a mean of zero

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Assumption
Linear Functional Form
Errors have constant variance
Errors are normally distributed
Errors are serially independent
Diagnostic Tests
Test(s) Consequences of failure
Ramsey Reset Test Coefficient estimates biased
1.White Test 1.Estimates are unbiased but inefficient
2.ARCH test 2.The standard errors of the coefficients are biased
Jarque-Bera test 1.Estimates are unbiased
2.Distribution of estimates unknown
1.Durbin=Watson test 1.Estimates are unbiased but inefficient
2.Durbin’s h-test 2.The standard errors of the coefficients are biased
3.Breusch-Godfrey test
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 Ramsey Reset Test (Linear Functional
Form)
• To test for Functional form
• After run the regression
• View>stability
diagnostics>Ramsey Reset
test
• =Linear regression has
correct functional form
• P-value< 0.05 indicates
specification errors (for
any given statistics)
Book: Applied Econometrics with Eviews Applications, Research Gate
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 Ramsey Reset Output
How to deal:

• Using a nonlinear transformation to the dependent and/or independent variables

may be used if the transformation is appropriate.
• For example, if the data are strictly positive, a log transformation may be feasible.
• Add another regressor which is a nonlinear function of one of the other variables.
• For example, regress on , and the graph of residuals versus predicted suggests a parabolic
curve, then it may make sense to regress on both and (i.e., -squared). The latter
transformation is possible even when and/or have negative values, whereas logging may not
be.

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 Testing for Heteroscedasticity (White test)
• View-Residual Test-White Heteroscedasticity (no cross terms). If
you follow these steps then your equation window should look
like this:
• Dealing with heteroscedasticity
• Click on Estimate in the equation window and then
choose the Options button. You should see a
window like that below in which you should check
the box marked Heteroskedasticity consistent
coefficient covariance and choose the White option:
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Testing for Heteroscedasticity (ARCH test)

• The null hypothesis that the residuals of the

model are homoscedastic.
• P-value>0.05 indicates homoscedasticity (constant
variance)
• P-value<0.05 indicates heteroscedasticity (rejecting
the null)
• How to deal?
• Robust standard errors

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Testing for non-normal residuals (Jarque-Bera test statistic )

• Non-normality of the residuals can occur if they are

either skewed or exhibit excessive kurtosis
(peakedness) relative to the normal distribution.
• Jarque-Bera test statistic.
• Under the null hypothesis that the residuals are
normally distributed which follows a Chi-squared
distribution with two degrees of freedom.
How to test:
• View-Residual Tests-Histogram – Normality Test
• To see the observation(s) causing the non-normality
go to:
View – Actual, Fitted, Residual – Actual, Fitted,
Residual Table

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 Dealing with non-normality
• One very obvious possible cause for non-normality
is the large negative outlier in the distribution of
the residuals. If we graph the residuals then we can
see that this corresponds to observation number 32.
To see
• We can include a dummy variable to deal with this
outlying observation. First use the command line to
create a new variable:
• series d32 = 0
• Now edit d32 by typing data d32 on the command
line.
• If you now include this as an extra regressor in
your equation you should obtain better results- to
check this do repeat the test.

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 When running a linear regression:

You should ask yourself the following questions:

1. Are the estimates consistent with my prior expectations based on economic theory?
2. Is the estimated model a good statistical representation of the data?

When assessing the statistical fit of the model you should look for:
3. The significance of the estimated coefficients (t-ratios/ or p-vals)
4. The joint significance of the variables in the model (the F-statistic)
5. The proportion of the variance of the endogoneous variable which is explained by the model (the statistics)

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 Summary
1-Estimate the model.
Test the null hypothesis that the slope coefficient is equal to zero against the alternative that it is not equal to
zero

2-Use diagnostic tests to examine the specification of the model

Apply tests for serial correlation, heteroscedasticity, functional form and normality of the errors. What do these
tell you about the specification of the model? What are the implications for the test you carried out.

3-Estimate an alternative specification(if needed)

Try estimating the model in first differences. Assess the extent to which this ‘improves’ the diagnostic test
results.

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