ECO601 Handouts by VUBuddy

ECO601 - BUSINESS ECONOMETRICS

Lesson No. Topics Page No.

Lesson 01 Introducing Econometrics & types of data …………………..…......................01 Lesson 02 Summation function, Application of Summation algebra …………………….09 Lesson 03 Quadratic Function & Simple Derivative ………………………….…….........21 Lesson 04 Partial Derivatives, Partial Differentiation Minima and Maxima ………….....33 Lesson 05 Multivariate Optimization & Review of Probability ……………………..……35 Lesson 06 Simple Regression Model ……………………………………………………..54 Lesson 07 Estimation and Testing in Regression Analysis………………………………..67 Lesson 08 Simple Regression by Microsoft Excel ………………………………………..79 Lesson 09 Multiple Regressions ……………………………………………………..…....89 Lesson 10 Multiple Regressions………………………………………………………......100 Lesson 11 Transformation for Regression…………………………………………..….....111 Lesson 12 Regression on standardized variables …………………………….….…....…..117 Lesson 13 Dummy Variables ……………………………………………………….…....125 Lesson 14 Transforming Variables in Regression…………………………………….…..133 Lesson 15 Multicollinearity …………………………………………………….…..…….140 Lesson 16 Multicollinearity: Remedial Measures ………………………………….……..147 Lesson 17 Heteroskedasticity ………………………………………………………….….152 Lesson 18 Detection of Heteroskedasticity: Formal Tests………………………………...158 Lesson 19 Detection and handling of Heteroskedasticity …………………………….…..163 Lesson 20 Autocorrelation ………………………………………………………………..171 Lesson 21 Detection of Autocorrelation ……………………………………....…….…....176 Lesson 22 Treating Autocorrelation ……………………………………………..….……184 Lesson 23 Estimating Non-Linear equation by OLS …………………………….…....….193 Lesson 24 Introduction to Stata ……………………………………………………..…....200 Lesson 25 Introduction to Stata ……………………………………………………..…....210 Lesson 26 Data Management in Stata …………………………………………….…..….218 Lesson 27 Stata Revision ……………………………………………………….……..….227 Lesson 28 Graphs in Stata ……………………………………………………………...…227 Lesson 29 Regression with Stata ………………………………………...………………..240 Lesson 30 Simultaneous Equation Models …………………………………………..…...253 Lesson 31 Simultaneous Equation Models-II..…………………………………………....258 Lesson 32 Indirect Least Square (ILS) …………………………………………………...265 Lesson 33 Two Stage Least Square ……………………………………………………...272 Lesson 34 2SLS & 3SLS Models with Stata …………………………………………….281 Lesson 35 2SLS & 3SLS Models ………………………………………………………....290 Lesson 36 Panel Data Models-II with Stata…..………………………………………......295 Lesson 37 Panel Data Methods & Post Estimation Tests with Stata …………….............305 Lesson 38 Qualitative and limited dependent variable model-I …….…………………….318 Lesson 39 Qualitative and limited dependent variable models-II…………………………324 Lesson 40 Qualitative and limited dependent variable models-III………………………..331 Lesson 41 Forecasting-I………………………………………………………………..….339 Lesson 42 Forecasting-II…………………………………………………………………..348 Lesson 43 Time Series, Cointegration and Error Correction-I……………………………360 Lesson 44 Time Series, Cointegration and Error Correction-I…………………………....369 Lesson 45 Time Series, Cointegration and Error Correction-III……………………….….375

Lecture 01

Overview of the Course

The course of Business Econometrics is designed for students of Business and Economics. It is

an introductory level course but covers all useful topics. The course is not only suitable for

students of Business, Commerce, Economics, and useful for Research students.

The presentation will be bilingual (English and Urdu) and is presented for a wide range of

audience. It will include the uses software for estimations of the econometric models discussed.

This includes the use of Microsoft Excel till the mid-term examination and later we plan to

introduce stata (software for statistics and econometrics developed and supplied by Stata

Corporation).

It will be supplemented with lecture notes, websites & learning modules of statistical software.

The course requires basic knowledge of statistics and probability. Understanding and use of

calculus will be an added advantage. An average basic background of business and economics is

also helpful.

Prescribed Text Books

• Wooldridge, J. M. (2007), Introductory Econometrics: A Modern Approach, 3rd Edition,

Thomson-South Western

• Gujarati, D. N. (2003), Basic Econometrics, 4th ed. (McGraw-Hill: New York)
• Butt, A. Rauf, “Lest Square Estimation of Econometrics Models”, (National Book

Foundation, Islamabad)

Supplementary Readings

• Green, William H. (2002), Econometric Analysis, 5th Edition, (New York University: New

York).

• Salvatore, D. & Reagle, D. (2002), Statistics and Econometrics, 2nd Edition, Schaum’s

outline series, (McGraw-Hill: New York).

• R.C. Hill, W.E. Griffiths and G.G. Judge (1993), Learning and Practicing Econometrics

(Wiley: London). [More advanced.]

Additional Resources

The above website provides a very good introduction to Use of a tool in Microsoft Excel to run

regressions with some diagnostic test.

The above website of University of California LA is a great collection of training material and

modules to learn the statistical software that we intend to use. It provides video tutorials,

lectures, training and learning material.

The above website of The World Bank Group is a data archive for more than 180 countries. It

provides macroeconomic and financial data on almost every aspect of the countries in the

world for more than 60 years.

What is Econometrics or Business Econometrics?

Traditional Perception

• Econometrics is the branch of economics concerned with the use of mathematical

methods (especially statistics) in describing economic systems.

• Econometrics is a set of quantitative techniques that are useful for making "economic

decisions"

• Econometrics is a set of statistical tools that allows economists to test hypotheses using

really world data. " Is the value of the US Dollar correlated to Oil Prices?", " Is Fiscal policy

really effective?", " Does growth in developed countries stimulate growth in the

developing countries?"

• The Economist's Dictionary of Economics defines Econometrics as " The setting up of

mathematical models describing mathematical models describing economic

relationships (such as that the quantity demanded of a good is dependent positively on

income and negatively on price), testing the validity of such hypotheses and estimating

the parameters in order to obtain a measure of the strengths of the influences of the

different independent variables."