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Tutorial Session 12 - Model Selection

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Tutorial Session 12 - Model Selection

Uploaded by

lucastone325
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Econ 314: Quantitative Economics

Tutorial 12- Model Selection


Please print and attempt prior to the tutorial session on.

1. Explain in your own words, what is meant by each of the following types of specification errors:

1.1 Incorrect error structure.


1.2 Incorrect functional form.
1.3 Errors of measurement.

2. What is omitted variable bias? Why is it a problem? How do you try to prevent it? Explain.

3. What is the inclusion of an irrelevant variable? Why is it a problem? How do you try to prevent
it? Explain.

4. Why is missing data a potential problem?

5. What are some of the criteria you would use to evaluate the appropriateness of your chosen
model

6. What can Ramsey’s RESET test be use for?

7. What is the basic difference between the traditional approach to model selection and Hendry’s
approach?

8. A major coffee importer is interested in knowing what the sensitivity of the demand for coffee
is to its own price, and whether other drinks such as tea and cola are substitutes. It can supply
you with a set of annual data giving the demand for coffee, the prices of coffee, tea and cola,
and for the period 1960-1999. You estimate the following model:

reg ccoffee ptea pcola pcoffee

Source | SS df MS Number of obs = 40


-------------+------------------------------ F( 3, 36) = 27.07
Model | 6624.26469 3 2208.08823 Prob > F = 0.0000
Residual | 2936.66104 36 81.5739177 R-squared = 0.6928
-------------+------------------------------ Adj R-squared = 0.6673
Total | 9560.92573 39 245.151942 Root MSE = 9.0318

------------------------------------------------------------------------------
ccoffee | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
ptea | 11.69218 15.90781 0.73 0.467 -20.57035 43.9547
pcola | 8.514633 8.677161 0.98 0.333 -9.083465 26.11273
pcoffee | -10.19486 10.07888 -1.01 0.319 -30.63578 10.24606
_cons | 160.0731 35.40204 4.52 0.000 88.27439 231.8717
------------------------------------------------------------------------------

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Comment on each of the following:
8.1 The goodness of fit
8.2 The statistical significance of the variables
8.3 The signs of the estimated coefficients. Are they as expected?
8.4 Do you think that you have omitted any important variables from your model? If so,
which ones?

You then add in an additional variable in your model, per capita income, obtaining the
following results:

. reg ccoffee ptea pcola pcoffee pcy

Source | SS df MS Number of obs = 40


-------------+------------------------------ F( 4, 35) = 97.16
Model | 8771.04186 4 2192.76047 Prob > F = 0.0000
Residual | 789.88387 35 22.5681106 R-squared = 0.9174
-------------+------------------------------ Adj R-squared = 0.9079
Total | 9560.92573 39 245.151942 Root MSE = 4.7506

------------------------------------------------------------------------------
ccoffee | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
ptea | 18.9075 8.399881 2.25 0.031 1.854837 35.96017
pcola | 5.942891 4.571652 1.30 0.202 -3.338056 15.22384
pcoffee | -17.78683 5.358168 -3.32 0.002 -28.66448 -6.909167
pcy | .4572321 .0468804 9.75 0.000 .36206 .5524043
_cons | -312.566 51.91447 -6.02 0.000 -417.9579 -207.174
------------------------------------------------------------------------------

Comment on how the addition of the new variable has impacted on each of the following:
8.5 The goodness of fit
8.6 The statistical significance of the variables
8.7 The signs of the estimated coefficients. Are they as expected?

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