AOF – IIFE – ECON1150 – Econometrics for Finance

LECTURE 01
MEASUREMENT LEVEL

Type Sub-type Example Value

Qualitative Nominal Name, Color, Province Coded
Ordinal Rank, Education degree Coded
*Binary: Gender, Yes/No Coded: 0 – 1
Quantitative Cardinal (Scale) Return, Rate, GDP,… Real number
Discrete - Continuous

DATA

Type Variable Frequency Size Example

Time series Xt Annual, Quarterly, T GD Pt (1990 – 2017)
Monthly, Daily
Cross-sectional Xi Section, individual, n GP Pi (province)
element
Panel (Pooled) X¿ Section  Time n ×T GP P¿

SCALE VARIABLE - AVERAGE VALUE

∑ Xi
Arithmetic mean: X =
n
Geometric mean: ~ √
X= n ∏ X i

Finance: ( 1+r ) =√ ∏(1+r i )

T

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 AOF – IIFE – ECON1150 – Econometrics for Finance

∑ ln(1+r i )
Logarithm: ln ( 1+r )=
T
POPULATION vs SAMPLE

Population Sample Meaning

Size Number of
infinite , unknown n or N or T
observations
Mean μ ∑ Xi Average value
^μ= X=
E( X ) : expected value n

Sum of 2
SS SS=∑ ( X i−mean )
Squares
Variance V ( X ) , Var ( X ) 2 SS Variability measure
SX=
σX
2 n−1

Standard Variability measure

SD ( X )=σ X = √ σ 2X S X =√ S 2X
Deviation
Standard SX
Error SE(X ) SE=
√n
Covariance Cov (X , Y ) Cov (X , Y )
Correlation Cov ( X , Y ) Relationship
ρ(X ,Y ) R ( X , Y )=
Coefficient SX SY measure

PROBABILITY
Probability of an event: Pr ( event ) ∈[0 , 1]
Discrete vs Continuous
Correct probability (confident level): 1−α

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 AOF – IIFE – ECON1150 – Econometrics for Finance

Incorrect probability (significant level): α

NORMAL DISTRIBUTION
2
X N (μ,σ ) 0.9
0.8
Mean = μ
0.7
2
Variance = σ 0.6
0.5
S.D = σ
0.4
0.3
0.2
Outlier: X > μ+ 3 σ
0.1
or X < μ−3 σ 0
0 1 2 3 4 5 6 7 8 9

X ~ N(3,1) X~N(6,0.5^2)
Critical value: z α
Most common critical value
z 0.05=1.645 ; z 0.025 =1.96

STUDENT DISTRIBUTION
Critical value – degree of freedom: t (df ) α

With large degree of freedom: t (large df ) α ≈ z α

CHI-SQUARE DISTRIBUTION
2
Critical value: χ ( df ) α
FISHER DISTRIBUTION
Critical value: F (d f 1 , df2)α

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 AOF – IIFE – ECON1150 – Econometrics for Finance

ESTIMATION
POINT ESTIMATE
Estimator: formula, method / Estimate: value
Estimator of θ is denoted by θ^

Unbiased: E ( θ^ ) =θ ^
Efficient: smallest Var ( θ) The Best: BUE
^
Inefficient: not-smallest Var ( θ) OK, not the best

Biased: E ( θ^ ) ≠θ Over-estimated: E ( θ^ ) >θ Not good

Under-estimated: E ( θ^ ) <θ Not good

INTERVAL ESTIMATE – CONFIDENT INTERVAL

With Confident level of (1−α ), CI for population mean
X −SE ∙ t (n−1) α /2 < μ< X + SE ∙ t ( n−1) α / 2

Or: X ± ME
ME is Marginal Error

HYPOTHESIS TESTING
Hypothesis pair

Two-tail One-tail (one-sided)

(Two-sided) Right-tail Left-tail
H 0 :θ=θ 0 H 0 :θ=θ 0 H 0 :θ=θ 0
H 1 : θ≠ θ 0 H 1 : θ>θ0 H 1 : θ<θ0

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 AOF – IIFE – ECON1150 – Econometrics for Finance

Significant level: α
Statistical value, Critical value, Reject H 0, Not reject H 0
Probability value: P−value
 P−value<α : Reject H 0
 P−value>α : Not Reject H 0

Statistic value Hypothesis Critical value Reject H 0

X−μ 0 H 0 : μ=μ 0
t= t (n−1) α /2 |t |>t (n−1 )α /2
SE H 1 : μ ≠ μ0

H 0 : μ=μ 0
t (n−1) α t >t ( n−1) α
H 1 : μ > μ0

H 0 : μ=μ 0
−t (n−1) α t ←t ( n−1 ) α
H 1 : μ < μ0

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