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By Kaoru Yamaguchi
What is Econometrics
Essentials of Methodology
Statement of theory or hypothesis
Specification of the mathematical model
Specification of the statistical or econometric
model
Collection of data
Estimation of the parameters of the chosen
econometric model
Tests of the hypothesis derived from the model
Forecasting
Economic Theory
Econometric Model
Estimation
Specification testing
and diagnostic
checking
NO
Is the model
adequate?
YES
Hypotheses tests
1. Economic Data
2. Energy Demand Data
3. Energy Supply Data
Quantity
90
80
70
60
50
40
30
20
10
0
10
Demand
Supply
Examples:
20
30
Price
40
Demand decreases
as price increases
Supply increases as
price increases
Energy demand
increases as GDP
increases
Specification of Statistical or
Econometric Model
1. Linear Model:
Q=b0 + b1 * P + u
2. Non-Linear (Log-Linear) Model:
Q=b0 * P^b1 * u
Log(Q)=Log(b0) + b1*Log(P) + u
Collection of Data
Time Series
Cross-Sectional
Pooled Data
Estimation of Parameters
1. Linear Model:
Q=B0 + B1 * P
2. Non-Linear (Log-Linear) Model:
Q=B0 * P^B1
Log(Q)=Log(B0) + B1*Log(P)
Q u an tity
Forecasting
90
80
70
60
50
40
30
20
10
0
10
Demand
Supply
20
30
Price
40
n=2
0.25
0.2
Probability
Probability
0.4
n=10
0.3
0.2
0.1
0.15
0.1
0.05
0
0
1
Event
Event
10
Normal Distribution
X
Normal distribution is a model for a
continuous random variable whose value
depends on a number of factors.
Mean value Xi/n=
Sample Variance Xi)2/(n-1)=
The t-Distribution
t20
t5
Desirable Property of
Estimator
The sample mean is the most frequently
used measure of the population mean
because of the following property.
Linearity
Unbiasedness
Efficiency
Best linear unbiased estimater (BLUE)
Linearity
An estimator is a linear estimator if it
is a linear function of the sample
observation.
EX. Sample mean=
(X1+X2+.+Xn)/n
Unbiasedness
UnBiased:E(X)=
Biased: E(X)<>
Efficiency
Efficient:E(X)=
Inefficient: E(X)=
Yi = B0 + B1 * Xi + ui
Regression Coefficients
Dependent variable
Sample Population
PRF: Population
Yi = B0 + B1* Xi + ui
Regression Function
SRF: Sample
Yi = b0 + b1* Xi + ei
Regression Function
Estimation of Parameters
The Method of Ordinary Least
Square (OLS)
Yi = b0 + b1* Xi + ei
80
Quantity
Estimate parameters to
minimize Residual
Sum of Square (RSS =
ei2)
e4
e3
60
e2
40
e1
20
0
10
20
30
Price
40
Regression in Practice
Violation of Assumptions
Multicollinearity
Heteroscedasticity