Analytics for Applied
Economics & Business
Course objective
Equip students with basic data analysis tools used
in economics and business.
Expect to get your hands dirty with data and
computer work.
Your lecturer
PhD in Economics from the
London School o

Solutions to the Review Questions at the End of Chapter 3
1. A list of the assumptions of the classical linear regression models disturbance terms
is given in Box 3.3 on p56 of the book.
We need to make the first four assumptions in order to prove that th

Chapter 3
A brief overview of the
classical linear regression model
Introductory Econometrics for
1
Regression
Regression is probably the single most important tool at the
econometricians disposal.
But what is regression analysis?
It is concerned with d

Chapter 1
Introduction
Introductory Econometrics for
1
Introduction:
The Nature and Purpose of Econometrics
What is Econometrics?
Literal meaning is measurement in economics.
Definition of financial econometrics:
The application of statistical and math

Chapter 8
Modelling volatility and correlation
Introductory Econometrics for
1
An Excursion into Non-linearity Land
Motivation: the linear structural (and time series) models cannot
explain a number of important features common to much financial data
- l

Chapter 5
Univariate time series modelling and
forecasting
Introductory Econometrics for
1
Univariate Time Series Models
Where we attempt to predict returns using only information contained in their
past values.
Some Notation and Concepts
A Strictly Stat

Chapter 4
Further issues with
the classical linear regression model
Introductory Econometrics for
1
Goodness of Fit Statistics
We would like some measure of how well our regression model actually fits the
data.
We have goodness of fit statistics to test

Solutions to the Review Questions at the End of Chapter 9
1. (a) This was a rather silly question since the answer is largely given away by the
question in part (b)! Nonetheless, although there are several methods that could be
used to determine whether t

Solutions to the Review Questions at the End of Chapter 6
1. (a) This is simple to accomplish in theory, but difficult in practice as a result of the
algebra. The original equations are
y1t 0 1 y 2 t 2 y 3t 3 X 1t 4 X 2 t u1t
(1)
( 2)
y 2 t 0 1 y 3t 2 X 1

Chapter 7
Modelling long-run relationship in finance
Introductory Econometrics for
1
Stationarity and Unit Root Testing
Why do we need to test for Non-Stationarity?
The stationarity or otherwise of a series can strongly influence its
behaviour and proper

Chapter 9
Switching models
Introductory Econometrics for
1
Switching Models
Motivation: Episodic nature of economic and financial variables. What
might cause these fundamental changes in behaviour?
- Wars
- Financial panics
- Significant changes in gover

Solutions to the Review Questions at the End of Chapter 4
1.
y t 1 2 x 2 t 3 x 3t 4 y t 1 u t
y t 1 2 x 2t 3 x3t 4 y t 1 vt .
Note that we have not changed anything substantial between these models in the sense
that the second model is just a re-parameter

Chapter 6
Multivariate models
Introductory Econometrics for
1
Simultaneous Equations Models
All the models we have looked at thus far have been single equations models of the
form
y = X + u
All of the variables contained in the X matrix are assumed to b

Solutions to the Review Questions at the End of Chapter 10
1. (a) The scope of possible answers to this part of the question is limited only by the
imagination! Simulations studies are useful in any situation where the conditions used
need to be fully und

Solutions to the Review Questions at the End of Chapter 5
1. ARMA models are of particular use for financial series due to their flexibility. They
are fairly simple to estimate, can often produce reasonable forecasts, and most
importantly, they require no

Chapter 10
Simulation Methods
Introductory Econometrics for
1
Simulation Methods in Econometrics and Finance
The Monte Carlo Method
This technique is often used in econometrics when the properties of a particular
estimation method are not known.
Examples