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SCHOOL OF ECONOMICS
Eco~
2206
I"TRODUCTORY ECOI\'OMETRICS
FINAL EXAMI~ATIO:'-!
SESSION 1,
2007
REMINDER: When performing statistical tests, always state the null and alternative hypotheses, the test statistic and it's distribution under the null hypothesis, the level of significance
and the conclusion of the test.
Xl,
/3 1 that
/31
? (2 marks)
(ii) Outline the advantages of using larger samples of data in regression analysis. (2 marks)
(iii) A model used analysing the effect of house characteristics on the sale price was:
log(price)
bdnns
+u
where price is the house price, area is the floor area of the house (measured in square metres), and bdrms
is the number of bedrooms. What is the partial effect on log (price) of increasing area by 1 square metre?
(2 marks).
(iv) What is the meaning of the term "contemporaneous exogeneity" as used in the context of time
series data? What is the difference between contemporaneous exogeneity and "strict exogeneity" as used in
multiple regression models for time series data? (2 marks)
ELASTICITY
ESTIMATED STANDARD
T-RATIO
PARTIAL STANDARDIZED
AT MEANS
COEFFICIENT ERROR
718 DF P-VALUE
CORR. COEFFICIENT
0.1487
0.74864E-Ol 0.6512E-02 11.50
0.000
0.353
0.3905
0.0261
0.15328E-Ol0.3370E-02 4.549 0.000
0.147
0.1592
0.13375E-Ol0.2587E-02 5.170 0.000
0.167
0.1612
0.0143
0.8108
5.4967
0.1105
49.73
0.000
0.852
0.0000
F=
(R~r - R;)/q
(1 - R~r)/(n - k - 1)
where q is the number of restrictions, and ur and r stand for unrestricted and restricted models, respectively.
(iv) We are interesting in constructing a confidence interval for the (conditional) predicted log( wage) when
educ = 13, exper = 11 and tenure = 7. To obtain the standard error for the prediction we need to estimate
a transformed model that is equivalent to (2.1). Derive the transformed model which will give a direct
estimate of the prediction and the standard error of the prediction. (3 marks).
3
log(price)
(3.1)
where price is the sale price (measured in $1000), lotsize is land area (square metres), sqrmtr (is the floor
area of the house (also measured in square metres), and bdTms is the number of bedrooms. Based on a
sample of data from 2005 house sales in Sydney, the following regression estimates were obtained:
log(price)
0.5481
(0.3945)(0.0823)
n
108,
R = 0.551,
(0.0353)
(0.0932)
-2
R = 0.538
(i) Construct a 90% confidence interval for ~3 (the coefficient on log(bdrms)). Is zero within the confidence
interval? (3 marks).
(ii) Given the estimation results, would you conclude that this is a good econometric model? Explain.
(3 marks).
(iii) We are concerned that the model in (3.1) may be misspecified. An alternative model specification where
all the variables are in level form (rather than in log form) is:
(3.2)
Outline a procedure for testing whether model (3.1) or model (3.2) is a better specification. What are the
limitations (if any) of the test? Explain. (4 marks)
0.251
(0.068)
mktval
-0.930
(0.287)
debtearn
-0.364
(0.249)
constant
-19.21
(4.839)
Observations(n)
177
0.233
R2
Note: The usual OL8 standard errors III () below the coefficient estimates.
(iv) Given that we know the model contains heteroskedasticity, what advice would you give an economist
wishing to analyse the determinant of Takeover with regression methods? (4 marks)
where emprtet is the employment rate, minW9t is the minimum wage and GN Pt is GNP (a proxy for labour
demand) in year t.
(i) What is the interpretation of the coefficient
/3 1
? (2 mark).
(ii) Is this a "static" or "dynamic" model? What is the purpose of including the lagged term minW9t_l?
Briefly explain. (2 marks).
Using annual data from 1950-1987, the following regression model estimates were obtained:
log(emprtetl
n
(0.77)
(0.031)
38, R 2
= 0.661,
(0.015)
f(2
(5.2)
(0.089)
= 0.641
(iii) Test the null hypothesis that the lagged term minW9t-l is insignificant using a 10 percent significance
level and the one-sided alternative that the coefficent is negative (Ho: /3 2 = 0, HI : (32 < 0 ). (2 marks).
(iv) There is not enough information in the results presented in (5.2) to construct a confidence interval for
the Long Run Propensity (LRP). Rewrite the model in (5.1) into a form which you give you a direct estimate
of the LRP (and the standard error on the LRP). What parameter in this transformed model corresponds
to the LRP ? (2 marks).
(v) I am concerned that the model in (5.2) may suffer from the "spurious regression" problem. V/hat is the
spurious regression problem and what simple adjustment to the model would help reduce the possibility of
this problem? (2 marks).
(6.1)
(0.618) (0.992)
353, R 2
= 0.212
Using the 1994 sample, the following regression results were obtained:
hprice
16.527 - 3.679nearplant
(6.2)
(0.538) (0.615)
182, R 2
= 0.172
(i) What is the interpretation of the coefficient on the intercept term in model (6.2) (that is, what does the
value 16.527 represent) ? What is the interpretation of the coefficient on nearplant in model (6.2) ?
(2 marks)
(ii) Can you infer from the estimates in (6.1), based on the year 2002 data, that the location of the plant
caused the price of houses located nearby to fall by an average of $61,980 ? Explain. (2 marks)
(iii) An alternative approach is to pool the data for both years and estimate the following model:
hprice
(0.876)
(6.3)
(1.128)
535, R 2 = 0.202
where year2 is a dummy variable equal to one if the observation is for the year 2002 (and is equal to zero if
the observation is for the year 1994).
What is the estimated effect of the plant on neighbouring house prices based on the "difference-in-difference"
estimator? Is the effect significantly different from 0 at the 5% significance level? (use the one-sided
alternative hypothesis that the coefficient is negative). (3 marks)
(iv) What, if any, would be the advantages of collecting and using panel data to evaluate the effect of the
location of the desalination plant on local property prices? Explain. (3 marks).
7
e
g
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f
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40
60
90
120
00
..
0.10
0.20
3.078
1.886
1.638
1.533
1.476
1.440
1.415
1.397
1.383
1.372
1.363
1.356
1.350
1.345
1.341
1.337
1.333
1.330
1.328
1.325
1.323
1.321
1.319
1.318
1.316
1.315
1.314
1.313
1.311
1.310
1.303
1.296
1.291
1.289
1.282
0.05
0.10
6.314
2.920
2.353
2.132
2.015
1.943
1.895
1.860
1.833
1.812
1.796
1.782
1.771
1.761
1.753
1.746
1.740
1.734
1.729
1.725
1.721
1.717
1.714
1.711
1.708
1.706
1.703
1.701
1.699
1.697
1.684
1.671
1.662
1.658
1.645
Significance Level
0.025
0.05
12.706
4.303
3.182
2.776
2.571
2.447
2.365
2.306
2.262
2.228
2.201
2.179
2.160
2.145
2.131
2.120
2.110
2.101
2.093
2.086
2.080
2.074
2.069
2.064
2.060
2.056
2.052
2.048
2.045
2.042
2.021
2.000
1.987
1.980
1.960
..
IS
0.01
0.02
31.821
6.965
4.541
3.747
3.365
3.143
2.998
2.896
2.821
2.764
2.718
2.681
2.650
2.624
2.602
2.583
2.567
2.552
2.539
2.528
2.518
2.508
2.500
2.492
2.485
2.479
2.473
2.467
2.462
2.457
2.423
2.390
2.368
2.358
2.326
0.005
0.01
63.656
9.925
5.841
4.604
4.032
3.707
3.499
3.355
3.250
3.169
3.106
3.055
3.012
2.977
2.947
2.921
2.898
2.878
2.861
2.845
2.831
2.819
2.807
2.797
2.787
2.779
2.771
2.763
2.756
2.750
2.704
2.660
2.632
2.617
2.576
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90
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m
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r
D
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f
F
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0
00
1
10.04
9.65
9.33
9.07
8.86
8.68
8.53
8.40
8.29
8.18
8.10
8.02
7.95
7.88
7.82
7.77
7.72
7.68
7.64
7.60
7.56
7.31
7.08
6.93
6.85
6.63
7.56
7.21
6.93
6.70
6.51
6.36
6.23
6.11
6.01
5.93
5.85
5.78
5.72
5.66
5.61
5.57
5.53
5.49
5.45
5.42
5.39
5.18
4.98
4.85
4.79
4.61
6.55
6.22
5.95
5.74
5.56
5.42
5.29
5.19
5.09
5.01
4.94
4.87
4.82
4.76
4.72
4.68
4.64
4.60
4.57
4.54
4.51
4.31
4.13
4.01
3.95
3.78
Example: The 1% critical value for numerator df=3 and denominator df=60 is 4.13.
8
5.06
4.74
4.50
4.30
4.14
4.00
3.89
3.79
3.71
3.63
3.56
3.51
3.45
3.41
3.36
3.32
3.29
3.26
3.23
3.20
3.17
2.99
2.82
2.72
2.66
2.51
9
4.94
4.63
4.39
4.19
4.03
3.89
3.78
3.68
3.60
3.52
3.46
3.40
3.35
3.30
3.26
3.22
3.18
3.15
3.12
3.09
3.07
2.89
2.72
2.61
2.56
2.41
10
4.85
4.54
4.30
4.10
3.94
3.80
3.69
3.59
3.51
3.43
3.37
3.31
3.26
3.21
3.17
3.13
3.09
3.06
3.03
3.00
2.98
2.80
2.63
2.52
2.47
2.32