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32 views32 pages

Chapter 3

Uploaded by

rafat.jallad
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Applied Econometrics 4rd edition

Dimitrios Asteriou
and
Stephen G Hall
Applied Econometrics 4rd edition

SIMPLE REGRESSION

1. Introduction to the Classical Linear Regression


Model
2. The OLS Method of Estimation
3. The Overall Goodness of Fit
4. Hypothesis Testing
5. How to Estimate a Simple Regression in
Eviews
6. Applications and Examples
Applied Econometrics 4rd edition

Learning Objectives
• Compute the equation of a simple regression line from a
sample of data, and interpret the slope and intercept of
the equation.
• A full understanding of the simple OLS method of
estimation and discussion of the properties of estimated
coefficients.
• Computation of a standard error of the estimate and
interpretation of its meaning and its use in Hypothesis
Testing.
• Understanding and interpretation of the R2
Applied Econometrics 4rd edition

Introduction

• Regression analysis is the process of constructing a


mathematical model or function that can be used to
predict or determine one variable by another variable.
• Key issue here is direction of causation of the two
variables, or which variable depends on the other.
• Therefore we have two cases of variables
dependent variables (usually denoted by Y)
independent or explanatory (usually denoted by
X)
Applied Econometrics 4rd edition

Regression Models
• Deterministic Regression Model: Y=b0+b1X
• Probabilistic Regression Model: Y=β0+β1X+u

• b0 and b1 are population parameters


• β0 and β1 are estimated by sample statistics
b0 and b1
Applied Econometrics 4rd edition

Regression Models
Probabilistic Regression Model: Yt=a+βXt+u

• Why probabilistic?

E(Yt)=a+βXt
Yt=E(Yt) +ut
Yt=a+βXt+u
Applied Econometrics 4rd edition

Regression Models
Why probabilistic?

1. Omission of explanatory variables


2. Aggregation of variables
3. Model specification
4. Functional misspecification
5. Measurement errors
Applied Econometrics 4rd edition

The Scatter Plot

X
300

250

200
X
150

100

50

0
60 80 100 120 140 160 180
Applied Econometrics 4rd edition

Four Ways of Fitting a Line in the Data

• By eye
• Connecting the first with the last observation
• Take the average of the first two and the
average of the two last and connect
• Apply Ordinary Least Squares
Applied Econometrics 4rd edition

The Scatter Plot


Applied Econometrics 4rd edition

Equation of the Regression Line

Yˆ  b0  b1 X
where : b0 = the sample intercept
b1 = the sample slope
Yˆ = the predicted value of Y
Applied Econometrics 4rd edition

Slope and Intercept of the


Regression Line
 X  Y 
  X  X Y  Y   XY  nXY  XY 
n
b  
 X  X   X n X
2 2 2
X
1 2

X 2

n

 Y  X
b Y b X  n b n
0 1 1
Applied Econometrics 4rd edition

Least Squares Analysis

SSXY    X  X Y  Y    XY 
 X  Y 
n
2

SSXX   X  X 
2
 X
2

 X
n
SSXY
b1  SSXX

 Y  X
b  Y b X  n b n
0 1 1
Applied Econometrics 4rd edition

Least Squares Analysis

Why OLS?
1. Elimination of the effect of the sign (positive and
negative residuals offset each other)
2. More weight is given to larger residuals and so we
work harder to reduce the very large errors
3. It chooses a method that follow some numerical and
statistical properties (remember unbiasedness,
efficiency etc)
Applied Econometrics 4rd edition

Assumptions of the Least Squares Analysis


Applied Econometrics 4rd edition

Properties of the OLS estimators


Linearity

Unbiasedness

Efficiency

BLUEness

Consistency
Applied Econometrics 4rd edition

Properties of the OLS estimators


• BLUE - What does the acronym stand for?

• “Estimator” - is an estimator of the true value of .


• “Linear” - is a linear estimator
• “Unbiased” - On average, the actual value of the α’s and β’s will be
equal to the true values.
• “Best” - means that the OLS estimator has minimum variance among
the class of linear unbiased estimators. The Gauss-Markov

theorem proves that the OLS estimator is best.


Applied Econometrics 4rd edition

Example: The Keynesian


Consumption Function
Applied Econometrics 4rd edition

Example: The Keynesian


Consumption Function

C2=B2*A2
D2=B2*B2

A22=SUM(A2:A21)
B22=SUM(B2:B21)

and so on!
Excel
Applied Calculations
Econometrics 4rd edition

b0=(C22-(A22*B22)/20)/(D22-((B22ˆ2)/20))=0.601888903

b1=AVERAGE(A2:A21)-G2*AVERAGE(B2:B21)=15.116408
Applied Econometrics 4rd edition

Excel Calculations (the easy way!)


• Step 1: go to the menu Tools/Data Analysis and choose the command
regression.
• Step 2: We are then asked to specify the Input Range, Output Range, and
a choice of including or not labels in the first row.
• Step 3: The Input Range is the columns that contain the data for Y and X
(i.e. we enter ‘$A$1:$B$21’ or simply select this area using the mouse).
• Step 4: The Output Range can be either a different sheet (not
recommended) or any empty cell in the current sheet (i.e. we might specify
cell F5).
• Step 5: Since we have chosen the labels in our selection we tick the box.
• Step 6: By clicking <OK> we obtain the display shown in Table 4.4.
Applied Econometrics 4rd edition

Excel Results

Applied Econometrics: A Modern Approach 22


using Eviews and Microfit © Dr D Asteriou
Applied Econometrics 4rd edition

The Regression Line


300
X

250

200

X
150
Linear (X)

100

50

0
60 80 100 120 140 160 180
Applied Econometrics 4rd edition

Regression in Eviews (1) (1)


Step 1 Open EViews.

Step 2 Choose File/New/Workfile in order to create a new file.

Step 3 Choose Undated or Irregular and specify the number of


observations (in this case 20). A new window appears which
automatically contains a constant (c) and a residual (resid) series.
Applied Econometrics 4rd edition

Regression in EViews (2)


Step 4 In the command line type:
genr x=0 (press enter)
genr y=0 (press enter)
which creates two new series named x and y that contain zeros
for every observation.
Open x and y as a group by selecting them and double clicking
with the mouse.

Step 5 Either type the data in EViews or copy/paste the data


from Excel®. To edit the series press the edit +/− button. After
finishing with editing the series press the edit +/− button again
to lock or secure the data.
Applied Econometrics 4rd edition

Regression in EViews (3)


Step 6 Once the data have been entered into Eviews, the
regression line (to obtain alpha and beta) may be estimated either
by typing:

ls y c x (press ‘enter’)

on the command line, or by clicking on Quick/Estimate


Equation and then writing your equation (i.e. y c x) in hte new
window.
Applied Econometrics 4rd edition

Reading the Eviews Regression Output


Applied Econometrics 4rd edition

The Coefficient of Determination


The proportion of variability of the dependent
variable accounted for or explained by the
independent variable in a regression model.
It is called R2 and it takes values from 0-1.

TSS=ESS+RSS

R2 = ESS/TSS or R2 = 1 – (RSS/TSS)
28
Applied Econometrics 4rd edition

The Coefficient of Determination


Problems associated with R2
1. Spurious regression problem
2. High correlation of Xt with another varible Zt
3. Correlation does not necessarily imply causality
4. Time Series vs Cross Sectional equations
5. Low R2 does not mean wrong choice of Xt
6. R2s from equation with different forms of Yt are
not comparable
29
Applied Econometrics 4rd edition

Hypothesis Tests for the Slope


of the Regression Model
H 0:  1  0 b  1
t 1

S
H 1:  1  0
b

S
where: S  e

H 0:  1  0
b
SSXX
SSE
S 
H 1:  1  0 n2
e

SSXX  
2  X
2

H 0:  1  0 X 
n
  the hypothesized slope
H 1:  1  0 1

df  n  2
Applied Econometrics 4rd edition

Hypothesis Tests for the Slope


of the Regression Model
Applied Econometrics 4rd edition

Hypothesis Tests for the Slope


of the Regression Model
We don’t like statistical Tables? – good!!!

We don’t need statistical Tables

A rule of thumb | t | > 2

The p-value approach (<0.05)

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