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Introductory Econometrics: Monash Econometrics and Business Statistics
Introductory Econometrics: Monash Econometrics and Business Statistics
Introductory Econometrics: Monash Econometrics and Business Statistics
2019
2019
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Welcome
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What is Econometrics?
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Outline of unit
I Week 1: Introduction
I Week 2: Review of Statistical Concepts
I Week 3: Linear Regression (OLS)
I Week 4: More on Linear Regression Analysis
I Week 5: Inference
I Week 6: Model Selection / Prediction
I Week 7: Binary Variables
I Week 8: Heteroskedasticity
I Week 9: Serial Correlation
I Week 10: Persistence in Time Series Data
I Week 11: Large Sample Properties of OLS
I Week 12: Revision
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Logistics
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Overall goal
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Two purposes of econometric modelling
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Two purposes of econometric modelling: 1. Prediction
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Two purposes of econometric modelling: 1. Prediction
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Two purposes of econometric modelling: 1. Prediction
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Two purposes of econometric modelling: 1. Prediction
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Two purposes of econometric modelling: 1. Prediction
Predictive models
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Two purposes of econometric modelling: 2. Policy
Prescription
Causal models
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Two purposes of econometric modelling: 2. Policy
Prescription
Causal models
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Two purposes of econometric modelling: 2. Policy
Prescription
Causal models
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The role of economics and finance theories
I Theories in economics and finance suggest how variables are
related to each other. Hence they are potentially useful for
developing causal and also predictive models. Examples:
I Economic theory suggests that quantity demanded is
negatively related to own price and positively related to income
of consumers.
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The role of economics and finance theories
I Theories in economics and finance suggest how variables are
related to each other. Hence they are potentially useful for
developing causal and also predictive models. Examples:
I Economic theory suggests that quantity demanded is
negatively related to own price and positively related to income
of consumers.
I Finance theory suggests that bond prices depend negatively on
inflation. This implies that predictors that are useful for
predicting inflation should also help in predicting bond prices.
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The role of economics and finance theories
I Theories in economics and finance suggest how variables are
related to each other. Hence they are potentially useful for
developing causal and also predictive models. Examples:
I Economic theory suggests that quantity demanded is
negatively related to own price and positively related to income
of consumers.
I Finance theory suggests that bond prices depend negatively on
inflation. This implies that predictors that are useful for
predicting inflation should also help in predicting bond prices.
I Also, we can use econometrics to test economics and finance
theories. For example:
I The efficient market hypothesis implies that all important
information for next period’s equity prices is in this period’s
price. Hence equity returns should be unpredictable. If we can
find a significant predictor for returns, we can reject this
hypothesis.
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Some examples
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Let’s think of bigger issues: What do YOU think?
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Econometric Analysis: Data
I The gold standard for measuring causal effects is using data
from randomised control trials (RCTs), similar to the way the
effectiveness of new drugs or vaccines are measured
I Such data is called experimental data
I Unfortunately, in business and economics we cannot run
experiments
I Most often econometric analysis has to be carried out using
observational (i.e. non-experimental) data.
I Returns to education: data on wage and educational
attainment of a sample of individuals.
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Cross-sectional versus Time series
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Cross-sectional versus Time series
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Cross-sectional versus Time series: Notation
I Conventionally, a regression model for cross section analysis is
written as:
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Econometric Analysis: Modelling
I The fundamental step is to think of all variables as random
variables (variables with several possible outcomes that have a
probability distribution)
I Equally as important is to remember that with no
information, the best prediction of a variable is the centre of
its distribution (typically its mean)
I Example: If we have a random sample of weekly wages in
Australia and based on that want to predict the wage of a
random person in Australia (not in our sample), what do we
do?
I Answer: ...
I If we group Australian population by age, the centre of the
wage distribution for different ages will not be the same
I To learn about mean of wage for each age, what should we
do?
I Calculating the average wage for each age in our sample is
not feasible (our sample may not have all ages in it) go to data
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Econometric Analysis: Modelling - interaction of theory
and practice
Distribution of wage conditional on different values of age
f (wage | age)
wage
20
40 age
60
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Econometric Analysis: Modelling - interaction of theory
and practice
Distribution of wage conditional on different values of age
f (wage | age)
wage
20
40 age
60
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Econometric Analysis: Modelling - interaction of theory
and practice
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Econometric Analysis: Modelling - interaction of theory
and practice
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Econometric Analysis: Modelling - The Main Focus
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Summary
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Quotes by Jim Barksdale
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Global Warming
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Global Warming
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Global Warming
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Global Warming
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Global Warming: Data
Global temperature anomalies (GTA)
0.6
0.4
0.2
GTA
0.0
−0.2
−0.4
Year
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Global Warming: Data
Greenhouse gases (GHG)
3.5
3.0
2.5
2.0
GHG
1.5
1.0
0.5
0.0
Year
Figure: GHG: Green House Gasses (An index that includes CO2 , CH4 ,
N2 O and CFC constructed by NASA)
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Global Warming: Data Analysis
S catter pl ot of GTA aga inst G HG
.6
.4
.2
.0
GTA
-.2
-.4
-.6
0 1 2 3 4
GHG
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Global Warming: Data Analysis
.6
.4
.2
.0
GTA
-.2
-.4
-.6
0 1 2 3 4
GHG
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Global Warming: Data Analysis
OLS regression fitted values
0.6
0.4
Global Temperature Anomalies
OLS Fitted Values
0.2
GTA
0.0
−0.2
−0.4
Year
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Global Warming: Data Analysis
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Global Warming: Data Analysis
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Poverty and Inequality
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Poverty and Inequality
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Poverty and Inequality
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Poverty and Inequality: Data
I Data from the World Bank Development Indicators (WDI)
data set
I Countries with highest and lowest under-5 mortality rates (per
1000 live births) in 2015
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Poverty and Inequality: Data Analysis
80
120,000 80
GDP_PERC APIT A
BASIC_WAT ER
60
SANIT AT ION
80,000 60
40
40,000 40
20
0 20 0
0 40 80 120 160 0 40 80 120 160 0 40 80 120 160
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Poverty and Inequality: Data Analysis
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Poverty and Inequality: Data Analysis
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