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Assignment11-2010

# Assignment11-2010 - AEB 6571 Econometric Methods I...

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AEB 6571 Econometric Methods I Assignment 11 - 2010 Charles B. Moss November 19, 2010 1. According to economic theory, farmland values are determined by a number of factors. The most frequently cited model for farmland values is based on the income capitalization formula V t = i =1 E [ CF t + i | Ω t ] i j =0 (1 + r j ) (1) where V t is value of farmland, E [ CF t i | Ω t ] is the expected value of cash ﬂows from farmland given information available at time t , and r t is the interest rate for agriculture. Under certain assumptions, Equation 1 can be reexpressed as V t = CF t r t . (2) Following the standard approach, we can take the natural logarithm of Equa- tion 2 to yield ln ( V t ) = α 0 + α 1 ln ( CF t ) + α 2 ln ( r t ) + t (3) Estimate Equation 3 using ordinary least squares and compute the variance matrix using the matrix operations in R. 2. The decline in the housing market has caused some uneasiness from agricultural lenders. In several regions of the country including Florida, a significant portion of farmland values may be due to the eventual conversion of farmland into urban 1

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uses. Hence, some fear that the recent decline in house prices have impaired the
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Assignment11-2010 - AEB 6571 Econometric Methods I...

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