Module One – Introduction and Simple Linear Regression
Model
1.0
Introduction to Econometrics
1.1
What is Econometrics
Econometrics
=
Art
consisting
several statistical techniques
to
empirically validate
various
theories
in finance,
economics and social sciences
using relevant data
Analyse data for purposes of:
o
Modelling relationship b/w variables
o
Testing relationship b/w variables
o
Assessing quality of the model
o
Forecasting variable of interest
Examples
o
Demand curve slopes downward
o
Does exchange rate follow a random walk?
o
How significant is the proportion of fraudulent tax returns submitted by self-employed business?
Other Examples
o
State government ponders question of
how much violent crime will be reduced if an additional million
dollars is spent putting more uniformed police on the street?
o
Bill Shorten questions
how many additional QLD voters will vote for labour party candidates in next
election if he spends an additional million dollars in advertising in QLD marginal seats
o
Owner of local Pizza Hut franchise decides
how much advertising space to purchase in the local
newspaper, and thus must estimate the relationship b/w advertising & sales
o
Real estate developer must
predict how much the population & income will increase to the south of
Springfield, QLD over the next few years, and whether it will be profitable to begin construction of new
Shopping & cinema malls
o
Financial planner must decide
how much of his client’s savings will go into a stock fund and how much
into the money market. This requires him to make predictions of the level of economic activity, the rate
of inflation and interest rates over his client’s planning horizon
o
Department of Transport in Melbourne must
decide how an increase in fares for public transport (trams,
trains and buses) will affect the number of travellers who switch to car or bike, and the effect of this
switch on revenue going to public transport
1.2
The Econometric Model
An econometric model consists of a
systematic
or
deterministic
part
and a random error
For example, an econometric model for demand of beer:
Q
Beer
d
=
f
(
p
Beer
, p
Wine
, p
Spirits
, Income
)
+
ε
If the
functional form is linear
f
(
p
Beer
, p
Wine
, p
Spirits
, Income
)
=
β
1
+
β
2
p
Beer
+
β
3
p
Wine
+
β
4
p
Spirits
+
β
5
Income
Then
Q
Beer
d
=
β
1
+
β
2
p
Beer
+
β
3
p
Wine
+
β
4
p
Spirits
+
β
5
Income
+
ε
Then using above formula we can test
o
Does the price of beer influence it’s consumption negatively?
H
0
= β
2
= 0
vs.
H
A
= β
2
< 0
o
Are beer and wine substitutes?
H
0
= β
3
= 0
vs.
H
A
= β
3
> 0
1.3
Data Collection and statistical Inference
Data Types
o
Time Series Form
Data
collected
over
discrete intervals of time
E.g. annual price of wheat in Australia from 1880 – 2012

E.g. daily price of gold from 1980-2012
o
Cross Section Form
Data
collected over
sample units in a particular time period
E.g. Income by states in Australia during 2012
E.g. high school graduation rates by state in 2012
o
Panel Data Form (combination)
Data

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- Fall '19
- Statistics, Normal Distribution, Regression Analysis, Variance, Statistical hypothesis testing, linear regression model