HARAMAYA UNIVERSITY

COLLEGE OF AGRICULTURE AND ENVIRONMENTAL SCIENCE

SCHOOL OF AGRICULTURAL ECONOMIC AND AGRIBUSINESS
DEPARTMENT OF AGRIBUSINESS AND VALUE CHAIN MANAGEMENT
ECONOMETRICS ( AgEc; 312 ) GROUP ASSIGNMENT
GROUP 4
NO.
GROUP MEMBER
ID NO.

1.
HAILU YALEW
3099/14

2.
HANGASA YOSUF
3115/14

3.
INJIGU NEGERA
3166/14

4.
MELAKE ZEWDYE
4254/13

5.
MIDEKSA FITA
3434/14

6.
MOGES GADISA
3500/14

7.
MOSISA BELAY
3535/14

SUBMISSION DATE ; NOV. / 16 /2024/.

SUBMITTED TO, Mr.KINDINEH SISAY

QUESTION
Briefly discuss in the following sections using the given sub sections. You should
have to provide examples for each section you discuss (if necessary). You can also
include other sub sections (if necessary).
6. Non-linear Regression and Time Series Econometrics
6.1. Non-linear regression models (Overview)
6.2. Time series Analysis
 ANSWER
Non-linear Regression and Time Series Econometrics
Econometrics often relies on linear models for simplicity, but many real-world
relationships are non-linear. Time series data, characterized by observations
collected over time, introduces additional complexities that linear models may not
adequately capture. This section discusses non-linear regression and time series
econometrics as tools to address these challenges.
Non-linear regression and time series econometrics are essential tools in
statistical modeling and economic analysis. They allow researchers to capture
complex relationships in data and understand temporal dynamics.
A key assumption of linear programming is that all its functions (objective
function and constraint functions) are linear. Although this assumption essentially
holds for many practical problems, it frequently does not hold. Therefore, it often
is necessary to deal directly with nonlinear programming problems, so we turn our
attention to this important area.
In one general form, the nonlinear programming problem is to find x (x1,
x2, . . . , xn) so as to Maximize f(x), subject to gi(x) ≤ bi, for i 1, 2, . . . ,
m, and x ≥ 0, where f(x) and the gi(x) are given functions of the n decision
variables. There are many different types of nonlinear programming problems,
depending on the characteristics of the f(x) and gi(x) functions. Different
algorithms are used for the different types.
Types of Nonlinear Programming Problems
1. Unconstrained Optimization
Unconstrained optimization problems have no constraints, so the objective is simply
to maximize f(x)
Over all values of x = (x1, x2, . . . , xn). The necessary condition that a

𝜕𝑓/𝜕𝑥𝑗= 0 at x = x*, for j = 1, 2, . . . , n.

particular solution x = x* be optimal when f(x) is a differentiable function is

2. Linearly Constrained Optimization

Linearly constrained optimization problems are characterized by constraints that
completely fit linear programming, so that all the gi(x) constraint functions are
linear, but the objective function f(x) is nonlinear. The problem is considerably
simplified by having just one nonlinear function to take into account, along with a
linear programming feasible region.
3. Convex Programming
Convex programming covers a broad class of problems that actually encompasses as
special cases all the preceding types when f(x) is a concave function to be
maximized.
Continuing to assume the general problem form (including maximization), the
assumptions are that
1. f(x) is a concave function.
2. Each gi(x) is a convex function.
Separable programming , is a special case of convex programming, where the one
additional assumption is that
3. All the f(x) and gi(x) functions are separable functions.
A separable function is a function where each term involves just a single variable,
so that the function is separable into a sum of functions of individual variables.
4. Non-convex Programming
Nonconvex programming encompasses all nonlinear programming problems that do not
satisfy the assumptions of convex programming.
 6.1. Non-linear Regression Models (Overview)
Linear regression assumes a straight-line relationship between the dependent and
independent variables. However, many economic phenomena exhibit curves,
thresholds, or interactions that require non-linear models for accurate
representation. Non-linear regression models relax the linearity assumption,
allowing for more flexible functional forms.
• Overview: Non-linear regression techniques aim to estimate parameters in models
where the relationship between the dependent and independent variables isn't
linear. This is achieved by using various functions
Non-linear regression model including polynomial, exponential, logarithmic, and
logistic functions.
Examples:
• Exponential Growth Model: This model is often used in population studies or
finance, where growth accelerates over time. The equation can be expressed as y =
aeᵇˣ , where a is the initial value, b is the growth rate, and x is time.
• Logistic Regression: This is commonly used in binary outcome scenarios, such as
predicting whether a customer will buy a product (yes/no). The logistic function is
given by p = 1/(1 + e^(-(β₀ + β₁ x))) , where p is the probability of the event
occurring.
• Polynomial Regression: This can model relationships that are curvilinear. An
example would be modeling the relationship between temperature and electricity
consumption, where higher temperatures might lead to non-linear increases in
consumption.
Non-linear regression requires different estimation techniques compared to linear
regression, often using iterative methods like the Newton-Raphson algorithm to find
parameter estimates.
6.2. Time Series Analysis
A time series is a chronological sequence of observations on a particular variable.
Usually the observations are taken at regular intervals (days, months, years), but
the sampling could be irregular. A time series analysis consists of two steps:
(1) building a model that represents a time series
(2) validating the model proposed
(3) using the model to predict (forecast) future values and/or impute missing
values.
If a time series has a regular pattern, then a value of the series should be a
function of previous values. The goal of building a time series model is the same
as the goal for other types of predictive models which is to create a model such
that the error between the predicted value of the target variable and the actual
value is as small as possible. The primary difference between time series models
and other types of models is that lag values of the target variable are used as
predictor variables, whereas traditional models use other variables as predictors,
and the concept of a lag value doesn’t apply because the observations don’t
represent a chronological sequence.
A time series is a set of statistics, usually collected at regular intervals. Time
series data occur naturally in many application areas.
economics - e.g., monthly data for unemployment, hospital admissions, etc.
finance - e.g., daily exchange rate, a share price, etc.
environmental - e.g., daily rainfall, air quality readings.
medicine - e.g., ECG brain wave activity every 2−8 secs.
The methods of time series analysis pre-date those for general stochastic
processesand Markov Chains. The aims of time series analysis are to describe and
summarise time series data, fit low-dimensional models, and make forecasts.
We write our real-valued series of observations as . ., X−2, X−1, X0, X1,
X2, . . ., a doubly infinite sequence of real-valued random variables indexed by Z.
Time series analysis involves statistical techniques to analyze time-ordered data
points, focusing on trends, seasonal patterns, and cyclical behaviors. It is
particularly useful in economics for forecasting and understanding economic
indicators over time.
Key Components:
• Trend: The long-term movement in the data. For instance, GDP growth may show an
upward trend over decades.
• Seasonality: Regular fluctuations that occur at specific intervals, such as
increased retail sales during the holiday season.
• Cyclic Patterns: Longer-term fluctuations that are not fixed in duration, such as
economic cycles of expansion and recession.

Examples:
ARCH/GARCH models: Autoregressive Conditional Heteroscedasticity/Generalized
Autoregressive Conditional Heteroscedasticity models are used when the variance of
the error term is not constant over time (e.g., financial time series with
volatility clustering).
Stock Price Volatility: GARCH models are applied to model and forecast the
volatility of stock prices, accounting for periods of high and low volatility.
Vector Autoregression (VAR) models: Used to model the interdependencies between
multiple time series.
Monetary Policy Analysis: VAR models are often employed to analyze the effects of
monetary policy on macroeconomic variables like inflation and unemployment,
considering the interdependencies between these variables over time.
ARIMA Models (AutoRegressive Integrated Moving Average): Used for forecasting
future points in a series by regressing the variable against its own past values.
For instance, an ARIMA model could predict future unemployment rates based on
historical data.
GDP Forecasting: ARIMA models are frequently used to forecast Gross Domestic
Product (GDP) growth, considering past GDP values and seasonal factors.
• Exponential Smoothing: A technique that applies decreasing weights to past
observations. It is particularly useful for short-term forecasting, such as
predicting monthly sales figures.
• Seasonal Decomposition of Time Series (STL): This method separates a time series
into trend, seasonal, and residual components. For example, it can be applied to
analyze monthly airline passenger numbers to understand seasonal travel patterns.
Additional Subsections (Optional):
• Model Selection and Diagnostic Testing: Choosing the appropriate non-linear
function and assessing the model's goodness-of-fit are crucial. Diagnostic tests
for non-linear models include checks for heteroscedasticity and autocorrelation.
In time series analysis, model selection involves choosing appropriate orders for
ARIMA models, and diagnostic tests assess the model's ability to capture
autocorrelation and seasonality.
• Causal Inference in Time Series: Establishing causality in time series data is
challenging due to the potential for confounding factors and reverse causality.
Techniques like Granger causality tests help assess the predictive power of one
variable on another.

Conclusion

Non-linear regression and time series econometrics are pivotal in enhancing our
understanding of complex relationships and dynamics in economic data. While linear
models provide a straightforward approach, they often fall short in capturing the
intricacies of real-world phenomena. Non-linear regression allows for more flexible
modeling, accommodating various functional forms such as exponential, logistic, and
polynomial relationships, which are essential for accurately representing economic
behaviors and trends.

Time series analysis, on the other hand, is indispensable for studying temporal
patterns within data. By focusing on components such as trends, seasonality, and
cyclic behaviors, it enables economists to make informed forecasts and understand
the underlying dynamics governing economic indicators over time. Techniques like
ARIMA, GARCH, and VAR models are instrumental in this regard, facilitating the
analysis of interdependencies and the volatility of key variables.

In conclusion, leveraging non-linear regression and robust time series

methodologies empowers researchers and policymakers to derive insights from complex
datasets, leading to more effective decision-making and economic forecasting. As
the field of econometrics continues to evolve, integrating these advanced
techniques will be crucial for addressing the challenges posed by non-linear
relationships and temporal dynamics in economic analysis.