CHAPTER 6: EXTENSIONS OF THE TWO-VARIABLE

LINEAR REGRESSION MODEL

Textbook:
(GP) Damodar N. Gujarati and Dawn C Porter (2004) Basic Econometrics, 5th
edition, The McGraw-Hill Companies Chapter 6

(DG) Damodar Gujarati, (2015) “Econometrics by Example” Second Edition,

McMillan Education Chapter 2

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 6.1 REGRESSION THROUGH THE ORIGIN Cont….

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 6.1 REGRESSION THROUGH THE ORIGIN Cont….

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 6.1 REGRESSION THROUGH THE ORIGIN Cont….

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 6.1 REGRESSION THROUGH THE ORIGIN Cont….

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 6.1 REGRESSION THROUGH THE ORIGIN

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 6.1 REGRESSION THROUGH THE ORIGIN Cont….

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Example 6.1 Estimating CAPM

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 Example 6.1 Estimating CAPM Cont…

• As these results show, the slope coefficient, which is the Beta coefficient, is
highly significant, for its p value is extremely small.
• Interpretation is that if the excess market rate goes up by 1 percentage
point, the excess return on the index of consumer goods sector goes up by
about 1.15 percentage points. Not only is the slope coefficient statistically
significant, but it is significantly greater than 1 (can you verify this?). If a
Beta coefficient is greater than 1, such a security (here a portfolio of 104
stocks) is said to be volatile; it moves more than proportionately with the
overall stock market index.

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 Example 6.1 Estimating CAPM Cont…

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 6.2 SCALING AND UNITS OF MEASUREMENT

• To grasp the ideas developed in this section, consider the data given in Table 6.2, which refers
to U.S. gross private domestic investment (GPDI) and gross domestic product (GDP), in
billions as well as millions of (chained) 2000 dollars.

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6.2 SCALING AND UNITS OF MEASUREMENT Cont…

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6.2 SCALING AND UNITS OF MEASUREMENT Cont…

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 6.2 SCALING AND UNITS OF MEASUREMENT Cont…

• .

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 6.2 SCALING AND UNITS OF MEASUREMENT Cont…

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 6.2 SCALING AND UNITS OF MEASUREMENT Cont…

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 6.2 SCALING AND UNITS OF MEASUREMENT Cont…

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 6.3 REGRESSION ON STANDARDIZED VARIABLES

• The units in which the regressand and regressor(s) are expressed affect the
interpretation of the regression coefficients. This can be avoided if we are
willing to express the regressand and regressor(s) as standardized variables
(Mean zero, varaince 1).
• A variable is said to be standardized if we subtract the mean value of the
variable from its individual values and divide the difference by the
standard deviation of that variable.

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 6.3 Regression on Standardized Variables Cont…

Note: Refer to page 158, please read out the advantages of standardized
regression in book please.

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 6.4 FUNCTIONAL FORMS OF REGRESSION MODELS

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 6.5 HOW TO MEASURE ELASTICITY: THE LOG-LINEAR MODEL

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 6.5 HOW TO MEASURE ELASTICITY: THE LOG-LINEAR MODEL Cont…

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 Example for The Log-Linear Model: Cobb Douglas Production Function

Notes:
1. Please refer to page 30-31 for detailed interpretation of these results in the text
“Econometrics by Examples”
2. Read out the Example 6.3 on page 161 in ‘Basic econometrics’

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 6.5 HOW TO MEASURE ELASTICITY: THE LOG-LINEAR MODEL Cont…

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6.6 SEMILOG MODELS: LOG–LIN & LIN-LOG MODEL

6.6A) Log-Lin Models

• Theses models are relevant to find out rate of growth of certain variables in
economics, such as population, money supply etcetera.

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 6.6A) Log-Lin Models Cont…

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 Example for Log–Lin Model

The interpretation of Equation 6.6.8 is that over the quarterly period 2003-I to
2006-III, expenditures on services increased at the (quarterly) rate of 0.705
percent.

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6.6B) LIN-LOG MODEL

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6.6B) Lin-Log Models Cont…

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 Example for Lin-Log Models

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 6.7 RECIPROCAL MODELS

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 6.7 Recıprocal Models Cont….

Economic Example: Relationship between child mortality and per capita

GNP in 66 countries

Note: Read out Example 6.6 on page 169-170 of ‘Basic Econometrics’

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 THE SLOPE AND ELASTICITY COEFFICIENTS OF THE VARIOUS MODELS

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 Choice of Functional Form: Some Practical Considerations

Some guidelines are:

• Underlying theory/hypothesis
• Coefficients should satisfy prior expectations
• Model that fits well to data is better
• Don’t over-emphasize R square as a criterion to
judge which model is better
• Don’t compare R squares of the two models if
dependent variable is not same
• Three types of significance, namely economic,
statistical and econometric significance may be taken
care of.

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 HOME TASK

Q1. Solve problem 6.2 on page 176 chapter 6 for the text ‘Basic
econometrics’.
Q 2. Redo examples 6.1 to 6.7 and rewrite the economic interpretation “IN
YOUR OWN WORDS”
Q 3: Interpret example given on page 30-31 for the text ‘Econometrics by
examples’ “IN YOUR OWN WORDS”.

Submission date is 11th November, 2020 via GoogleClassroom as a single

PDF.

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