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Chapter2 Econometrics Old
Chapter2 Econometrics Old
V c Hong V
University of Economics HCMC
June 2015
V c Hong V (UEH)
Applied Econometrics
June 2015
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Some Terminology
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Applied Econometrics
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A Simple Assumption
The average value of u, the error term, in the population is 0.
That is,
E (u) = 0
This is not a restrictive assumption, since wa can always use 0
to normalize E (u) to 0.
We need to make a crucial assumption about how u and x are
related.
We want it to be the case that knowing something about x does
not give us any information about u, so that they are completely
unrelated. That is, that
E (u|x) = E (u) = 0, which implies
E (y |x) = 0 + 1 x.
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Applied Econometrics
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Applied Econometrics
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or
xi (yi (
y 1 x) 1 xi ) = 0
xi (yi y) = 1
n
X
(xi x)(yi y) = 1
i=1
V c Hong V (UEH)
xi (xi x)
i=1
n
X
(xi x)2
i=1
Applied Econometrics
June 2015
10 / 1
1 =
provided that
Pn
i=1 (xi
Pn
(x x)(yi
i=1
Pn i
)2
i=1 (xi x
y)
x)2 > 0
0 = y 1 x
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Applied Econometrics
June 2015
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Applied Econometrics
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xi (yi 0 1 xi ) = 0
i=1
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Applied Econometrics
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More terminology
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Applied Econometrics
June 2015
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(yi y)2 =
ui (yi y) = 0
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Goodness-of-fit
How do we think about how well our sample regression line fit
our sample data?
Can compute the fraction of the total sum of squares (SST) that
is explained by the model, call this the R-squared of regression
SSE
SSR
R2 =
=1
SST
SST
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Applied Econometrics
June 2015
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Unbiasedness of OLS
Assume the population model is linear in parameters as
y = 0 + 1 x + u
Assume we can use a random sample of size n,
{(xi , yi ) : i = 1, 2, . . . , n}, from the population model. Thus we
can write the sample model yi = 0 + 1 xi + ui
Assume E (u|x) = 0 and thus E (ui |xi ) = 0
Assume there is variation in the xi
In order to think about unbiasedness, we need to rewrite our
estimator in term of the population parameters.
Start with a simple rewrite of the formula as
P
(xi x)yi
1 =
, where
sx2
P
sx2 = (xi x)2
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Applied Econometrics
June 2015
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X
(xi x)(0 + 1 xi + ui )
X
X
X
=
(xi x)0 +
(xi x)1 xi +
(xi x)ui
X
X
X
= 0
(xi x) + 1
(xi x)xi +
(xi x)ui
(xi x)yi =
P
(xi x) = 0
P
(xi x)xi = 0
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Applied Econometrics
June 2015
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1 = 1 +
sx2
let di = (xi x), so that
1 P
1 = 1 + ( 2 ) di ui , then
sx
1 P
E (1 ) = 1 + ( 2 ) di E (ui ) = 1
sx
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Applied Econometrics
P
(xi x)ui , and
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Unbiasedness Summary
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Homoskedastic Case
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Heteroskedastic Case
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1 X
di ui )
Var (1 ) = Var (1 + 2
sx
X
1
= ( 2 )2 Var (
di ui )
sx
1 X 2
= ( 2 )2
di Var (ui )
sx
1 X 2 2
1 X 2
di = 2 ( 2 )2
di
= ( 2 )2
sx
sx
1
2
= 2 ( 2 )2 = 2 = Var (1 )
sx
sx
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The larger the error variance, 2 , the larger the variance of the
slope estimate.
The larger the variability in the x, the smaller the variance of the
slope estimate.
As a result, a larger sample size should decrease the variance of
the slope estimate.
Problem that the error variance is unknown.
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ui = yi 0 1 xi
= (0 + 1 xi + ui ) 0 1 xi
= ui (0 0 ) (1 1 )
Then , an unbiased estimator of 2 is
2 =
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P 2
1
ui = SSR/(n 2)
(n 2)
Applied Econometrics
June 2015
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sx
if we substitute
for then we have the standard error of 1 .
pP
se(1 ) =
/
(xi x)2
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Applied Econometrics
June 2015
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Linear in Parameters
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Applied Econometrics
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Assumption SLR. 2
Random Sampling
We have a random sample of size n, {xi , i = 1, 2, . . . , n}, following the population model in Assumption SLR. 1
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Assumption SLR. 3
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Assumption SLR. 4
The error u has the same variance given any value of the
explanatory variable. In other words,
E (u|x) = 0.
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Applied Econometrics
June 2015
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Assumption SLR. 5
Homoskedasticity
The error u has the same variance given any value of the
explanatory variable. In other words,
Var (u|x) = 2 .
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Applied Econometrics
June 2015
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Stata code
Number of obs
F( 3, 4161)
Prob > F
R-squared
Adj R-squared
Root MSE
=
=
=
=
=
=
4165
266.12
0.0000
0.1610
0.1604
.42289
-----------------------------------------------------------------------------lwage |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------exp |
.0100694
.0006
16.78
0.000
.0088931
.0112456
wks |
.0058775
.0012784
4.60
0.000
.0033711
.0083839
occ |
-.311163
.0131532
-23.66
0.000
-.3369502
-.2853758
_cons |
6.360351
.062024
102.55
0.000
6.238751
6.481951
------------------------------------------------------------------------------
V c Hong V (UEH)
Applied Econometrics
June 2015
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