INTRODUCTION
1. (NARROW) DEFINITION OF ECONOMETRICS: A
SUBJECT ABOUT ESTIMATING QUANTITATIVE
RELATIONSHIP BETWEEN VARIABLES IN ECON AND
FINANCE.
EXAMPLE: TWO VARIABLES: X AND Y; WHAT IS THE
RELATIONSHIP? IF X GOES UP BY 1 UNIT, WHAT IS
THE CHANGE IN Y?
2.
REVIEW OF PROBABILITY AND STATISTICAL
CONCEPTS
RANDOM VARIABLE (can be regarded as a device to
represent uncertainty): WHEN THE OUTCOME OF A
RANDOM EXPERIMENT (UNCERTAINTY) IS
NUMERICAL IN VALUE (ITS A NUMBER), A RANDOM
VARIABLE IS A VARIABLE WITH THE OUT
PROBABILITY DISTRIBUTION (SAMPLING
DISTRIBUTION) OF A RANDOM VARIABLE, X:
MEANING OF PROBABILITY (OF AN EVENT): HOW
OFTEN IT HAPPENS OVER MANY, MANY SAMPLES? IN
OTHER WORDS, THE (RELATIVE) FREQUENCY OF
OCCURRENCE (OF THE EVENT). [FOR EXAMPLE, THE
PROBABIL
EXAMPLE:
1
0
0.25
-1
X =
1/2
0.25
E(X) = 1*1/2 + 0*0.25 + (-1)*0.25 = 0.25.
NOTE THAT A DIFFERENT PROBABILITY
DISTRIBUTION WILL PRODUCE A DIFFERENT VALUE
OF E(X).
A FEW THINGS TO REMEMBER ABOUT E(X):
- E(X) IS A FIXED NUMBER. ITS VALUE IS THE
SAME REGARDL
SOME IMMEDIATE CONSEQUENCES OF THE
ASSUMPTIONS:
E( Y ) = B1 + B2*X . WHY?
V(Y) = V(u) . WHY?
V(u) = E(u2). WHY?
ESTIMATION OF THE Bs IN THE LINEAR MODEL:
1. GENERAL CONCEPTS:
ESTIMATOR: ANY FORMULA THAT
PROVIDES AN ESTIMATE IS CALLED AN
ESTIMATOR.
ESTIM