Introduction Econometrics

for
Mathematics Bachelor Students

Kees Jan van Garderen

Programme Director BSc & MSc in Econometrics
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Kees Jan van Garderen
Programme Director BSc & MSc in Econometrics
BSc& MSc in Econometrics UvA, MSc title:
Fractionele Matrix Calculus
PhD, Trinity College, Cambridge, title:
Inference in Curved Exponential Models
uses non-Riemannian geometry in econometric/statistical models
Research Interest : Econometrics
– Econometric Theory - Exact Distribution Theory
– Approximations (Tilted or Saddlepoint, Edgeworth )
– Inference and Curvature in Econometric Models
– Income Inequality
– Aggregation
Teaching
– 2nd year Econometrics 1 and 2
– M.Phil. Tinbergen Institute, Advanced Econometrics II
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Department of Quantitative Economics

Actuarial Science

Operations Research

Econometrics & Economic Theory (Mathematical Economics)

• UvA - Econometrics
• CeNDEF (Center for Nonlinear Dynamics in Economics and Finance)

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 Econometrics

A p plication of M a the m a tica l a n d S ta tistica l T e ch n iq u es to

E con om ic P ro b le m s

M a th e m a tical E con om etrics O p era tio n s R esea rch

E con o m ics a nd M a na ge m e nt

T he ore tical M o de ls U sin g D a ta O ptim ization

G en eral E qu ilib rium E stim ation D e te rm inistic
P rod u ce r/C o nsum er In feren ce S to cha stic
D yna m ica l S yste m s D iscre te

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Econometrics and Statistics

Regression Models
Linear & non-Linear
Multivariate Analysis
Cross-section
Likelihood Theory
Time Series
ARIMA
Non-Parametrics

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Econometrics and Statistics

Non Experimental (i.i.d) Data

sample selection (self-selection)
endogeneity, instrumental variables
Misspecified Models : diagnostics/ model choice
Structural Modelling
causal relationships : economic theory and insight
Identification : Structural <==> Reduced Form
moment conditions
Multivariate Time-series Analysis VAR
with Non-stationary data Cointegration CVAR

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Three Examples

1. Modelling wages
a. Instrumental Variable regression
b. Heckman

2. Demand and Supply

3. Cointegration (modelling with non-stationary timeseries)

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Modelling Wages I : returns to schooling

Log(income) =  +  schooling +  age +  tenure +…+ 

Expected income determines length of schooling

People with high academic ability earn more and will go to school longer
(pay-offs for them are higher)
Inappropriate to attribute to schooling only.

E-views

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Regression with Instrumental Variables

Model
y  X 
Model
Stochastics
Estimator (OLS)
b  X X  1 X y
Gewone Kleinste Kwadraten
(via regressie of lineaire algebra)  X X  1 X X   
X X  1 X 
b   ( n ) n

Unbiased?
Consistent? ? ?
E |X  0  E b | X  
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Regression with Instrumental Variables

plim 1n Z    0 Z uncorrelated with  Valid

plim 1n Z X  QZX Z and X are correlated Relevant

y  X 
Z ' y  Z ' X   Z '
 IV   Z ' X  Z ' y
1

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Modelling Wages II : sex discrimination

Log(income) =  +  Male +  age + …. + 

. reg LGEARNCL COLLYEAR EXP ASVABC MALE ETHBLACK ETHHISP

------------------------------------------------------
LGEARNCL | Coef. Std. Err. t P>|t|
-------------+----------------------------------------
COLLYEAR | .1380715 .0201347 6.86 0.000
EXP | .039627 .0085445 4.64 0.000
ASVABC | .0063027 .0052975 1.19 0.235
MALE | .3497084 .0673316 5.19 0.000
ETHBLACK | -.0683754 .1354179 -0.50 0.614
ETHHISP | -.0410075 .1441328 -0.28 0.776
_cons | 1.369946 .2884302 4.75 0.000
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Modelling Wages II

Log(income) =  +  Male +  age + …. + 

Working = 1 : Z* > 0
= 0 : Z*  0

Z* = f( predicted earnings, children, married, ) + 

If  and  correlated, then E[  | working ]  0

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Maximum Likelihood

. g COLLYEAR = 0

. replace COLLYEAR = S-12 if S>12

(286 real changes made)

. g LGEARNCL = LGEARN if COLLYEAR>0

(254 missing values generated)

. heckman LGEARNCL COLLYEAR EXP ASVABC MALE ETHBLACK ETHHISP, select(ASVABC MALE ETHBLACK
ETHHISP SM SF SIBLINGS)

Iteration 0: log likelihood = -510.46251

Iteration 1: log likelihood = -509.65904
Iteration 2: log likelihood = -509.19041
Iteration 3: log likelihood = -509.18587
Iteration 4: log likelihood = -509.18587

Heckman selection model Number of obs = 540

(regression model with sample selection) Censored obs = 254
Uncensored obs = 286
Wald chi2(6) = 95.83
Log likelihood = -509.1859 Prob > chi2 = 0.0000

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Maximum Likelihood
------------------------------------------------------------------------------
| Coef. Std. Err. z P>|z| [95% Conf. Interval]
-------------+----------------------------------------------------------------
LGEARNCL |
COLLYEAR | .126778 .0196862 6.44 0.000 .0881937 .1653623
EXP | .0390787 .008101 4.82 0.000 .023201 .0549565
ASVABC | -.0136364 .0069683 -1.96 0.050 -.027294 .0000211
MALE | .4363839 .0738408 5.91 0.000 .2916586 .5811092
ETHBLACK | -.1948981 .1436681 -1.36 0.175 -.4764825 .0866862
ETHHISP | -.2089203 .159384 -1.31 0.190 -.5213072 .1034667
_cons | 2.7604 .4290092 6.43 0.000 1.919557 3.601242
-------------+----------------------------------------------------------------
select |
ASVABC | .070927 .008141 8.71 0.000 .054971 .086883
MALE | -.3814199 .1228135 -3.11 0.002 -.6221298 -.1407099
ETHBLACK | .433228 .2184279 1.98 0.047 .0051172 .8613388
ETHHISP | 1.198633 .299503 4.00 0.000 .6116179 1.785648
SM | .0342841 .0302181 1.13 0.257 -.0249424 .0935106
SF | .0816985 .021064 3.88 0.000 .0404138 .1229832
SIBLINGS | -.0376608 .0296495 -1.27 0.204 -.0957729 .0204512
_cons | -4.716724 .5139176 -9.18 0.000 -5.723984 -3.709464
-------------+----------------------------------------------------------------
/athrho | -.9519231 .2430548 -3.92 0.000 -1.428302 -.4755444
/lnsigma | -.4828234 .0727331 -6.64 0.000 -.6253776 -.3402692
-------------+----------------------------------------------------------------
rho | -.7406524 .1097232 -.8913181 -.4426682
sigma | .6170388 .0448791 .5350593 .7115788
lambda | -.4570113 .0967091 -.6465576 -.267465
------------------------------------------------------------------------------
LR test of indep. eqns. (rho = 0): chi2(1) = 7.63 Prob > chi2 = 0.0058
------------------------------------------------------------------------------
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 Maximum Likelihood versus Linear regression

. heckman LGEARNCL COLLYEAR EXP ASVABC MALE ETHBLACK ETHHISP,

select(ASVABC MALE ETHBLACK ETHHISP SM SF SIBLINGS)

------------------------------------------------------------------------------
| Coef. Std. Err. z P>|z| [95% Conf. Interval]
-------------+----------------------------------------------------------------
LGEARNCL |
COLLYEAR | .126778 .0196862 6.44 0.000 .0881937 .1653623
EXP | .0390787 .008101 4.82 0.000 .023201 .0549565
ASVABC | -.0136364 .0069683 -1.96 0.050 -.027294 .0000211
MALE | .4363839 .0738408 5.91 0.000 .2916586 .5811092
ETHBLACK | -.1948981 .1436681 -1.36 0.175 -.4764825 .0866862
ETHHISP | -.2089203 .159384 -1.31 0.190 -.5213072 .1034667
_cons | 2.7604 .4290092 6.43 0.000 1.919557 3.601242
-------------+----------------------------------------------------------------

. reg LGEARNCL COLLYEAR EXP ASVABC MALE ETHBLACK ETHHISP

------------------------------------------------------------------------------
LGEARNCL | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
COLLYEAR | .1380715 .0201347 6.86 0.000 .0984362 .1777068
EXP | .039627 .0085445 4.64 0.000 .022807 .0564469
ASVABC | .0063027 .0052975 1.19 0.235 -.0041254 .0167309
MALE | .3497084 .0673316 5.19 0.000 .217166 .4822509
ETHBLACK | -.0683754 .1354179 -0.50 0.614 -.334946 .1981952
ETHHISP | -.0410075 .1441328 -0.28 0.776 -.3247333 .2427183
_cons | 1.369946 .2884302 4.75 0.000 .8021698 1.937721
------------------------------------------------------------------------------
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Demand and Supply

Q =  - 0.9 P + 1.0 income + 1 ( demand )

Q = 3 + 1.5 P – 1.0 cost + 2 ( supply )

Q : Quantity (in kg),

P : Price (in €)
income in ‘000 €
cost in ‘000 €.
~ N( 0,  ).

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Demand and Supply
(unconventionally P(rices) on horizontal axis) Shift
in
Q Q
12
supply 12
supply
10 10

8
Increase 8

6 cost 6

4 4

2 demand 2
demand
P In P
2 4 6 8 10 12
coscreas 2 4 6 8 10 12

Increase at r t & e
and inc
Q
income supply om 12
Q
12
solutions
10 10

8 8

6 6

4 4

2 demand 2

P P
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2 2007
4 6 8 10 12 2 4 6 8 10 1217
 Data : Price & Quantity
Q
Q
12
10
10

8
Varying 8
6
Cost only 6
4 4
2 2
P
2 4 6 8 10 12 P
2 4 6 8 10 12
In
Varying Va strum
income est riab en
i m le t a l Q
Q a t io 12
n supply
10
15
12.5 8
10 6
7.5 4
5 2
2.5 demand
P
P 2 4 6 8 10 12
2
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 True relations
Q =  - 0.9 P + 1.0 income + 1 ( demand )
Q = 3 + 1.5 P – 1.0 cost + 2 ( supply )
Estimated relations
Demand Equation Supply Equation
Dependent Variable: Q Dependent Variable: Q
Method: Two-Stage Least Squares Method: Two-Stage Least Squares
Using cost as instrument to move the supply equation Using income as instrument to move demand equation
Sample: 1 100 Sample: 1 100
Included observations: 100 Included observations: 100
Instrument list: COST INCOME Instrument list: COST INCOME

Variable Coefficient Std. Error t-Statistic Prob. Variable Coefficient Std. Error t-Statistic Prob.

C 0.122396 0.043038 2.843922 0.0054 C -0.005513 0.043690 -0.126174 0.8999

P -0.864002 0.021714 -39.78930 0.0000 P 1.474120 0.018785 78.47458 0.0000
INCOME 0.959883 0.012300 78.03892 0.0000 COST -0.957523 0.012311 -77.78015 0.0000

R-squared 0.986776 Mean dependent var 2.402183 R-squared 0.986688 Mean dependent var 2.402183
Adjusted R-squared 0.986503 S.D. dependent var 1.377962 Adjusted R-squared 0.986413 S.D. dependent var 1.377962
S.E. of regression 0.160086 Sum squared resid 2.485870 S.E. of regression 0.160619 Sum squared resid 2.502439
Durbin-Watson stat 1.695308 Second-stage SSR 1.856418 Durbin-Watson stat 1.837763 Second-stage SSR 1.856418

We can :
• Estimate 2 equations correctly from 1 set of data
Lesson:
• Running regression can be very misleading
• Use economic theory and econometric techniques
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Cointegration : Money demand

m-p =  + 2 y +3 p + 4 R
m -p : real money balances in logs,
y : real transactions (i.e.GDP) in logs,
p : log price index,
R : interest rate

GDP90 : GDP(A) at current market prices index (1990=100)

P : RPI: Retail price index all items (1985=100)

M4 : Money stock M4 (end period) : level, Seasonally Adjusted
R : Treasury Bills 3 month yield
Q1,...,Q4: Quarter 1 to quarter 4 dummy.

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Possibilities

Minor Econometrics
Deficiency Programme/Schakel programma
B.Sc. in Econometrics and ORM or Actuarial Sciences
M.Sc. in Econometrics (Financial Econometrics, Math Econ)

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M.Sc. Econometrics /Mathematical
Economics
Blok I (15 EC) Blok III (15 EC)
Adv Econometrics 1 Field course (Fin. Ectr)
General Equilibrium Th. Field course (Micr. Ectr)
Elective Field course (caput ME2)

Blok II (15 EC) Blok IV

Adv. Econometrics 2 Master Thesis
Game Theory
Elective

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Deficiëntieprogramma Econometrie (35 ec)
studenten met WO bachelor- of master Wiskunde

of Natuurkunde of equivalente exacte opleiding

… alvorens toegelaten te kunnen worden tot de MSc in

Econometrics, de volgende deficiënties weggewerkt te hebben:
steunvakken KReS 3 (5 ec) en KReS 4 (5 ec)
verbredingsvak Econometrie 3 (5 ec)
verbredingsvak Tijdreeksanalyse (5 ec)
verbredingsvak Wiskundige Economie B (5 ec)
Wiskundige Economie A (5 ec) en Inleiding Speltheorie (5 ec)

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Tot spoedig ziens !?
Kees Jan van Garderen
Programme Director BSc & MSc Econometrics
Faculty of Economics and Business
University of Amsterdam
Roetersstraat 11
1018 WB, Amsterdam

Room E 3.25, Economics Building

E-Building, central tower

http://www.studeren.uva.nl/msc_econometrics
http://studiegids.uva.nl/web/uva/sgs/en/p/241.html

tel +31-20-525 4220

fax +31-20-525 4349

K.J.vanGarderen@uva.nl
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