ECN 211

Data Provided:
Statistical tables by Neave Students may introduce into the examination one sheet of A4 (two sides) of formulae. This sheet should be attached to the answer book at the end of the examination.

DEPARTMENT OF ECONOMICS ECONOMETRIC METHODS

Spring Semester 2006-2007 2 Hours

There are SIX QUESTIONS. Attempt THREE questions only.

The marks shown in each question indicate the weighting given to component sections.

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(a)

Explain each of the following properties of an estimator: (i) Unbiasedness (ii) Consistency (iii) 'BLUEness'

(10% each=30%)

(b)

Consider the following regression results for a sample of US mothers. BWGHT is the birth weight of the baby in grammes, MAGE is the mothers age in years at the time of the childs birth and MAGESQ is its square. MWHITE is a dummy variable taking the value 1 if the mother is white and zero otherwise. CIGS is the average number of cigarettes smoked per day by the mother during pregnancy and DRINK is the average number of alcoholic drinks per week consumed by the mother during pregnancy. C denotes the estimated intercept.
Dependent Variable: BWGHT Method: Least Squares Variable C MAGE MAGESQ MWHITE CIGS DRINK R-squared Log likelihood Durbin-Watson stat Coefficient 1836.947 89.23865 -1.436448 326.4389 -18.26158 21.06740 0.062905 -3625.012 2.029055 Included observations: 472 Std. Error 662.4986 44.25111 0.730680 73.83523 6.947170 57.68587 t-Statistic 2.772756 2.016642 -1.965906 4.421180 -2.628635 0.365209 Prob. 0.0058 0.0443 0.0499 0.0000 0.0089 0.7151 3459.239 6.256333 0.000012

Mean dependent var F-statistic Prob(F-statistic)

(i)

Discuss the results obtained for the coefficients and their statistical significance. (20%) Test the hypothesis that all of the regressors are irrelevant. (10%) Test the hypothesis that an extra cigarette smoked per day during pregnancy reduces birth weight by one ounce, given that one ounce is equal to 28.35 grammes. (10%) Given that another variable FWHITE is available, taking the value 1 if the father is white and zero otherwise, explain how the model should be respecified to test the hypothesis that a relevant factor in determining a babys weight is whether or not both parents are white. (10%) For this regression a White Test yielded a P-value of 0.009. Interpret this result and explain what implications it has for the estimated coefficients possessing the properties listed in (a). (20%) 2 CONTINUED

(ii) (iii)

(iv)

(v)

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ECN 211 2 In the model

Y = X + u
Y is an n 1 vector, X is an n k matrix with n > k, is a k 1 vector of parameters, including an intercept, and u is an n 1 vector of variables with the properties E(u) = 0, E(uuT ) = 2 I n X is non-random with X T X 0 . The model is estimated by OLS and the estimated model is Y = Xb + e, where b is the OLS estimator for and e is an n 1 vector of empirical residuals. Demonstrate each of the following: (a) (b) (c) (d) XTe = 0 XTX is a square symmetric matrix with rank k . e = ( T ) T u
1

The matrix M = ( T ) T
1

}
(12% each =50%)

is a symmetric idempotent matrix.

(e)

E (e T e ) = 2Tr (M )

where Tr ( M ) denotes the trace of the matrix M, defined in (e). (25%) (f) var(b) = 2(XTX)-1. (25%)

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In the following regression results the data are from a sample of US married women in 1991. LWAGE is the (natural) logarithm of the hourly wage rate (US$), EDUC is years of full-time education, EXPER is years of employment and EXPERSQ is the square of EXPER. The remaining regressors are dummy variables, taking the value 1 if the woman is Hispanic, Black or a member of a Trade Union and zero otherwise. C denotes the estimated intercept.
Dependent Variable: LWAGE Method: Least Squares Variable C EDUC EXPER EXPERSQ HISPANIC BLACK UNION R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat Coefficient 0.806617 0.090779 0.015072 -0.000255 0.008163 -0.019741 0.193916 0.196214 0.187678 0.477239 128.6826 -384.9808 1.893447 Included observations: 572 Std. Error 0.155069 0.009458 0.007593 0.000175 0.086631 0.086059 0.059225 t-Statistic 5.201677 9.598416 1.985136 -1.457751 0.094227 -0.229393 3.274226 Prob. 0.0000 0.0000 0.0476 0.1455 0.9250 0.8186 0.0011 2.215512 0.529507 1.370562 1.423786 22.98725 0.000000

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

(a) (b)

Discuss the results obtained. (20%) Evaluate the number of years of experience at which the wage is predicted to have a stationary point and establish the nature of this stationary point. Explain whether you find your answer plausible. (15%) Evaluate the implied difference in hourly wage rate between a union member and a non-member. (15%) Explain the purpose of the F-statistic in the EViews regression output, and its relationship to R-squared. (15%) When the last four regressors are omitted, the residual sum of squares becomes 131.8412. Use this information to test the hypothesis that the last four regressors in the results table are redundant. Explain your answer. (15%)

(c)

(d)

(e)

Question continued on next page.

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Question 3 continued.

(f)
140 120 100 80 60 40 20 0

Consider the following analysis of the residuals from this regression:

Series: Residuals Sample 3 999 Observations 572 Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis Jarque-Bera Probability -2 -1 0 1 2 1.98e-16 -0.007877 1.987690 -2.349598 0.474725 -0.010411 5.123265 107.4571 0.000000

Explain the terms skewness, kurtosis and Jarque-Bera, and discuss the strength of the evidence to support the view that the disturbances are normally distributed. (20%)

Y = X + u where Y is an n 1 vector of observations on the dependent variable, X is an n k matrix of observations on the regressors, is a k 1 vector of parameters, and u is an n 1 vector of zero-mean constant variance disturbances, which follow an AR(1) process with parameter .
(a) Derive an expression for the covariance matrix E ( uu T ) . (30%) (b) Explain the properties of the OLS estimator of in this model. (20%) (c) Describe in detail how you would implement the Generalised Least Squares estimator of if is known, and outline how you might proceed if is unknown. (50%)

Consider the model

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(a)

Explain the possible causes of heteroscedasticity in the disturbances of a regression model. (25%) The model Yi = 1 + 2 X 2,i + 3 X 3 ,i + u i ; i = 1,2,....,300

(b)

has been estimated by OLS. In the next stage of the analysis the regression is performed on two subsets of the sample data separately, the 120 observations with the highest values of X3 and the 120 observations with the smallest values of X3. These further regressions yielded residual sums of squares of 585.0 and 351.0 respectively. (i) Demonstrate how this information can be used to perform a test for heteroscedasticity. State carefully the null and alternative hypotheses and explain the logic of the test. (15%) What conclusions do you draw from the test? (10%) (iii) Describe other tests for heteroscedasticity which might be employed. Explain their relative merits. (25%) (iv) What remedial action should be taken if tests indicate the presence of heteroscedasticity? (25%)

(ii)

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(a)

Explain the circumstances in which an economist may wish to estimate a model with a dummy dependent variable. (10%) Prove that in the simple regression model
Yi = + X i + u i

(b)

with a dummy dependent variable, Y, variance of the disturbances is given by

and zero-mean disturbances, the

var( u i ) = ( + X i )(1 X i )

(30%) (c) Explain what is meant by the dummy variable trap in the context of using seasonal dummy variables with time series data, and demonstrate that in this situation there will be perfect multicollinearity. (20%) Explain the term orthogonality in the context of multicollinearity. Show that in the multiple regression model

(d)

Y = X + u
where Y is an n 1 vector of observations on the dependent variable, X is an n k matrix of observations on the regressors, is a k 1 vector of parameters, and u is an n 1 vector of zero-mean independently distributed constant variance disturbances, if the regressors are orthogonal then the OLS estimator will yield the same results for the slope parameters as would be obtained from k - 1 separate simple regressions. (40%)

END OF QUESTION PAPER

ECN 211