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add an extended discussion of test behavior under the alternative, introduce the
noncentral t-distribution, and illustrate test power. We also include new Monte Carlo
experiments illustrating test properties when the explanatory variable is random.
Chapter 4 discusses in detail nonlinear relationships such as the log-log, log-linear,
linear-log, and polynomial models. We have expanded the discussion of diagnostic
residual plots and added sections on identifying influential observations. The familiar
concepts of compound interest are used to motivate several log-linear models. We add
an appendix on the concept of mean squared error and the minimum mean squared
error predictor.
Chapter 5 introduces multiple regression in the random-x framework. The Frisch–
Waugh–Lovell (FWL) theorem is introduced as a way to help understand interpretation
of the multiple regression model and used throughout the remainder of the book.
Discussions of the properties of the OLS estimator, and interval estimates and t-tests,
are updated. The large sample properties of the OLS estimator, and the delta method,
are now introduced within the chapter rather than an appendix. Appendices provide
further discussion and Monte Carlo properties to illustrate the delta method. We
provide a new appendix on bootstrapping and its uses.
Chapter 6 adds a new section on large sample tests. We explain the use of control
variables and the difference between causal and predictive models. We revise the
discussion of collinearity and include a discussion of influential observations. We
introduce nonlinear regression models and nonlinear least squares algorithms are
discussed. Appendices are added to discuss the statistical power of F-tests and further
uses of the Frisch–Waugh–Lovell theorem.
Chapter 7 now includes an extensive section on treatment effects and causal modeling
in Rubin’s potential outcomes framework. We explain and illustrate the interesting
regression discontinuity design. An appendix includes a discussion of the important
“overlap” assumption.
Chapter 8 has been reorganized so that the heteroskedasticity robust variance of the
OLS estimator appears before testing. We add a section on how model specification
can ameliorate heteroskedasticity in some applications. We add appendices to explain
the properties of the OLS residuals and another to explain alternative robust sandwich
variance estimators. We present Monte Carlo experiments to illustrate the differences.
Chapter 9 has been reorganized and streamlined. The initial section introduces the
different ways that dynamic elements can be added to the regression model. These
include using finite lag models, infinite lag models, and autoregressive errors. We
carefully discuss autocorrelations, including testing for autocorrelation and
representing autocorrelations using a correlogram. After introducing the concepts of
stationarity and weak dependence, we discuss the general notions of forecasting and
forecast intervals in the context of autoregressive distributed lag (ARDL) models.
Following these introductory concepts, there are details of estimating and using
alternative models, covering such topics as choosing lag lengths, testing for Granger
causality, the Lagrange multiplier test for serial correlation, and using models for policy
analysis. We provide very specific sets of assumptions for time-series regression
models and outline how heteroskedastic and autocorrelation consistent, robust,
standard errors are used. We discuss generalized least squares estimation of a time-
series regression model and its relation to nonlinear least squares regression. A
detailed discussion of the infinite lag model and how to use multiplier analysis is
provided. An appendix contains details of the Durbin–Watson test.
Chapter 10 on endogeneity problems has been streamlined because the concept of
random explanatory variables is now introduced much earlier in the book. We provide
further analysis of weak instruments and how weak instruments adversely affect the
precision of IV estimation. The details of the Hausman test are now included in the
chapter.
Chapter 11 now adds Klein’s Model I as an example.
Chapter 12 includes more details of deterministic trends and unit roots. The section on
unit root testing has been restructured so that each Dickey–Fuller test is more fully
explained and illustrated with an example. Numerical examples of ARDL models with
nonstationary variables that are, and are not, cointegrated have been added.
The data in Chapter 13 have been updated and new exercises added.
Chapter 14 mentions further extensions of ARCH volatility models.
Chapter 15 has been restructured to give priority to how panel data can be used to
cope with the endogeneity caused by unobserved heterogeneity. We introduce the
advantages of having panel data using the first difference estimator, and then discuss
the within/fixed effects estimator. We provide an extended discussion of cluster robust
standard errors in both the OLS and fixed effects model. We discuss the Mundlak
version of the Hausman test for endogeneity. We give brief mention to how to extend
the use of panel data in several ways.
The Chapter 16 discussion of binary choice models is reorganized and expanded. It
now includes brief discussions of advanced topics such as binary choice models with
endogenous explanatory variables and binary choice models with panel data. We add
new appendices on random utility models and latent variable models.
Appendix A includes new sections on second derivatives and finding maxima and
minima of univariate and bivariate functions.
Appendix B includes new material on conditional expectations and conditional
variances, including several useful decompositions. We include new sections on
truncated random variables, including the truncated normal and Poisson distributions.
To facilitate discussions of test power, we have new sections on the noncentral t-
distribution, the noncentral Chi-square distribution, and the noncentral F-distribution.
We have included an expanded new section on the log-normal distribution.
Appendix C content does not change a great deal, but 20 new exercises are included.
Statistical Tables for the Standard Normal cumulative distribution function, the
t-distribution and Chi-square distribution critical values for selected percentiles, the
F-distribution critical values for the 95th and 99th percentiles, and the Standard Normal
density function values appear in Appendix D.
A useful “cheat sheet” of essential formulas is provided at the authors’ website,
www.principlesofeconometrics.com, rather than inside the covers as in the previous
edition.
Data Files
Data files for the book are provided in a variety of formats at the book website
www.wiley.com/college/hill. These include
ASCII format (*.dat). These are text files containing only data.
Definition files (*.def). These are text files describing the data file contents, with a
listing of variable names, variable definitions, and summary statistics.
EViews (*.wf1) workfiles for each data file.
Excel (*.xls) workbooks for each data file, including variable names in the first row.
Comma separated values (*.csv) files that can be read into almost all software.
Stata (*.dta) data files.
SAS (*.sas7bdat) data files.
GRETL (*.gdt) data files.
R (*.rdata) data files.
The author website www.principlesofeconometrics.com includes a complete list of the data
files and where they are used in the book.
Additional Resources
The book website www.principlesofeconometrics.com includes
Individual data files in each format as well as ZIP files containing data in compressed
format.
Book errata.
Brief answers to odd number problems. These answers are also provided on the book
website at www.wiley.com/college/hill.
Additional examples with solutions. Some extra examples come with complete
solutions so that students will know what a good answer looks like.
Tips on writing research papers.
Acknowledgments
Authors Hill and Griffiths want to acknowledge the gifts given to them over the past 40
years by mentor, friend, and colleague George Judge. Neither this book nor any of the
other books we have shared in the writing of would have ever seen the light of day without
his vision and inspiration.
We also wish to give thanks to the many students and faculty who have commented on
the fourth edition of the text and contributed to the fifth edition. This list includes Alejandra
Breve Ferrari, Alex James, Alyssa Wans, August Saibeni, Barry Rafferty, Bill Rising, Bob
Martin, Brad Lewis, Bronson Fong, David Harris, David Iseral, Deborah Williams, Deokrye
Baek, Diana Whistler, Emma Powers, Ercan Saridogan, Erdogan Cevher, Erika Haguette,
Ethan Luedecke, Gareth Thomas, Gawon Yoon, Genevieve Briand, German Altgelt, Glenn
Sueyoshi, Henry McCool, James Railton, Jana Ruimerman, Jeffery Parker, Joe Goss,
John Jackson, Julie Leiby, Katharina Hauck, Katherine Ramirez, Kelley Pace, Lee Adkins,
Matias Cattaneo, Max O’Krepki, Meagan McCollum, Micah West, Michelle Savolainen,
Oystein Myrland, Patrick Scholten, Randy Campbell, Regina Riphahn, Sandamali
Kankanamge, Sergio Pastorello, Shahrokh Towfighi, Tom Fomby, Tong Zeng, Victoria
Pryor, Yann Nicolas, and Yuanbo Zhang. In the book errata we acknowledge those who
have pointed out our errors.
R. Carter Hill
William E. Griffiths
Guay C. Lim
Table of Contents
Cover
Title Page
Copyright
Dedication
Preface
List of Examples
CHAPTER 1: An Introduction to Econometrics
1.1 Why Study Econometrics?
1.2 What Is Econometrics About?
1.3 The Econometric Model
1.4 How Are Data Generated?
1.5 Economic Data Types
1.6 The Research Process
1.7 Writing an Empirical Research Paper
1.8 Sources of Economic Data
Probability Primer
KEYWORDS
P.1 Random Variables
P.2 Probability Distributions
P.3 Joint, Marginal, and Conditional Probabilities
P.4 A Digression: Summation Notation
P.5 Properties of Probability Distributions
P.6 Conditioning
P.7 The Normal Distribution
P.8 Exercises
CHAPTER 2: The Simple Linear Regression Model
KEYWORDS
2.1 An Economic Model
2.2 An Econometric Model
2.3 Estimating the Regression Parameters
2.4 Assessing the Least Squares Estimators
2.5 The Gauss–Markov Theorem
2.6 The Probability Distributions of the Least Squares Estimators
2.7 Estimating the Variance of the Error Term
2.8 Estimating Nonlinear Relationships
2.9 Regression with Indicator Variables
2.10 The Independent Variable 10
2.11 Exercises
Appendix 2A Derivation of the Least Squares Estimates
Appendix 2B Deviation from the Mean Form of b2
Appendix 2C b2 Is a Linear Estimator
Appendix 2D Derivation of Theoretical Expression for b2
Appendix 2E Deriving the Conditional Variance of b2
Appendix 2F Proof of the Gauss–Markov Theorem
Appendix 2G Proofs of Results Introduced in Section 2.10
Appendix 2H Monte Carlo Simulation
CHAPTER 3: Interval Estimation and Hypothesis Testing
KEYWORDS
3.1 Interval Estimation
3.2 Hypothesis Tests
3.3 Rejection Regions for Specific Alternatives
3.4 Examples of Hypothesis Tests
3.5 The p-Value
3.6 Linear Combinations of Parameters
3.7 Exercises
Appendix 3A Derivation of the t-Distribution
Appendix 3B Distribution of the t-Statistic under H 1
Appendix 3C Monte Carlo Simulation
CHAPTER 4: Prediction, Goodness-of-Fit, and Modeling Issues
KEYWORDS
4.1 Least Squares Prediction
4.2 Measuring Goodness-of-Fit
4.3 Modeling Issues
4.4 Polynomial Models
4.5 Log-Linear Models
4.6 Log-Log Models
4.7 Exercises
Appendix 4A Development of a Prediction Interval
Appendix 4B The Sum of Squares Decomposition
Appendix 4C Mean Squared Error: Estimation and Prediction
CHAPTER 5: The Multiple Regression Model
KEY WORDS
5.1 Introduction
5.2 Estimating the Parameters of the Multiple Regression Model
5.3 Finite Sample Properties of the Least Squares Estimator
5.4 Interval Estimation
5.5 Hypothesis Testing
5.6 Nonlinear Relationships
5.7 Large Sample Properties of the Least Squares Estimator
5.8 Exercises
Appendix 5A Derivation of Least Squares Estimators
Appendix 5B The Delta Method
Appendix 5C Monte Carlo Simulation
Appendix 5D Bootstrapping
CHAPTER 6: Further Inference in the Multiple Regression Model
KEYWORDS
6.1 Testing Joint Hypotheses: The F-test
6.2 The Use of Nonsample Information
6.3 Model Specification
6.4 Prediction
6.5 Poor Data, Collinearity, and Insignificance
6.6 Nonlinear Least Squares
6.7 Exercises
Appendix 6A The Statistical Power of F-Tests
Appendix 6B Further Results from the FWL Theorem
CHAPTER 7: Using Indicator Variables
KEYWORDS
7.1 Indicator Variables
7.2 Applying Indicator Variables
7.3 Log-Linear Models
7.4 The Linear Probability Model
7.5 Treatment Effects
7.6 Treatment Effects and Causal Modeling
7.7 Exercises
Appendix 7A Details of Log-Linear Model Interpretation
Appendix 7B Derivation of the Differences-in-Differences Estimator
Appendix 7C The Overlap Assumption: Details
CHAPTER 8: Heteroskedasticity
KEYWORDS
8.1 The Nature of Heteroskedasticity
8.2 Heteroskedasticity in the Multiple Regression Model
8.3 Heteroskedasticity Robust Variance Estimator
8.4 Generalized Least Squares: Known Form of Variance
8.5 Generalized Least Squares: Unknown Form of Variance
8.6 Detecting Heteroskedasticity
8.7 Heteroskedasticity in the Linear Probability Model
8.8 Exercises
Appendix 8A Properties of the Least Squares Estimator
Appendix 8B Lagrange Multiplier Tests for Heteroskedasticity
Appendix 8C Properties of the Least Squares Residuals
Appendix 8D Alternative Robust Sandwich Estimators
Appendix 8E Monte Carlo Evidence: OLS, GLS, and FGLS
CHAPTER 9: Regression with Time-Series Data: Stationary Variables
KEYWORDS
9.1 Introduction
9.2 Stationarity and Weak Dependence
9.3 Forecasting
9.4 Testing for Serially Correlated Errors
9.5 Time-Series Regressions for Policy Analysis
9.6 Exercises
Appendix 9A The Durbin–Watson Test
Appendix 9B Properties of an AR(1) Error
CHAPTER 10: Endogenous Regressors and Moment-Based Estimation
KEYWORDS
10.1 Least Squares Estimation with Endogenous Regressors
10.2 Cases in Which x and e are Contemporaneously Correlated
10.3 Estimators Based on the Method of Moments
10.4 Specification Tests
10.5 Exercises
Appendix 10A Testing for Weak Instruments
Appendix 10B Monte Carlo Simulation
CHAPTER 11: Simultaneous Equations Models
KEYWORDS
11.1 A Supply and Demand Model
11.2 The Reduced-Form Equations
11.3 The Failure of Least Squares Estimation
11.4 The Identification Problem
11.5 Two-Stage Least Squares Estimation
11.6 Exercises
Appendix 11A 2SLS Alternatives
CHAPTER 12: Regression with Time-Series Data: Nonstationary Variables
KEYWORDS
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12.1 Stationary and Nonstationary Variables
12.2 Consequences of Stochastic Trends
12.3 Unit Root Tests for Stationarity
12.4 Cointegration
12.5 Regression When There Is No Cointegration
12.6 Summary
12.7 Exercises
CHAPTER 13: Vector Error Correction and Vector Autoregressive Models
KEYWORDS
13.1 VEC and VAR Models
13.2 Estimating a Vector Error Correction Model
13.3 Estimating a VAR Model
13.4 Impulse Responses and Variance Decompositions
13.5 Exercises
Appendix 13A The Identification Problem
CHAPTER 14: Time-Varying Volatility and ARCH Models
KEYWORDS
14.1 The ARCH Model
14.2 Time-Varying Volatility
14.3 Testing, Estimating, and Forecasting
14.4 Extensions
14.5 Exercises
CHAPTER 15: Panel Data Models
KEYWORDS
15.1 The Panel Data Regression Function
15.2 The Fixed Effects Estimator
15.3 Panel Data Regression Error Assumptions
15.4 The Random Effects Estimator
15.5 Exercises
Appendix 15A Cluster-Robust Standard Errors: Some Details
Appendix 15B Estimation of Error Components
CHAPTER 16: Qualitative and Limited Dependent Variable Models
KEYWORDS
16.1 Introducing Models with Binary Dependent Variables
16.2 Modeling Binary Choices
16.3 Multinomial Logit
16.4 Conditional Logit
16.5 Ordered Choice Models
16.6 Models for Count Data
16.7 Limited Dependent Variables
16.8 Exercises
Appendix 16A Probit Marginal Effects: Details
Appendix 16B Random Utility Models
Appendix 16C Using Latent Variables
Appendix 16D A Tobit Monte Carlo Experiment
Appendix A: Mathematical Tools
Appendix B: Probability Concepts
Appendix C: Review of Statistical Inference
Appendix D: Statistical Tables
Index
End User License Agreement
List of Examples
Example P.1 Using a cdf
Example P.2 Calculating a Conditional Probability
Example P.3 Calculating an Expected Value
Example P.4 Calculating a Conditional Expectation
Example P.5 Calculating a Variance
Example P.6 Calculating a Correlation
Example P.7 Conditional Expectation
Example P.8 Conditional Variance
Example P.9 Iterated Expectation
Example P.10 Covariance Decomposition
Example P.11 Normal Distribution Probability Calculation
Example 2.1 A Failure of the Exogeneity Assumption
Example 2.2 Strict Exogeneity in the Household Food Expenditure Model
Example 2.3 Food Expenditure Model Data
Example 2.4a Estimates for the Food Expenditure Function
Example 2.4b Using the Estimates
Example 2.5 Calculations for the Food Expenditure Data
Example 2.6 Baton Rouge House Data
Example 2.7 Baton Rouge House Data, Log-Linear Model
Example 3.1 Interval Estimate for Food Expenditure Data
Example 3.2 Right-Tail Test of Significance
Example 3.3 Right-Tail Test of an Economic Hypothesis
Example 3.4 Left-Tail Test of an Economic Hypothesis
Example 3.5 Two-Tail Test of an Economic Hypothesis
Example 3.6 Two-Tail Test of Significance
Example 3.3 (continued) p-Value for a Right-Tail Test
Example 3.4 (continued) p-Value for a Left-Tail Test
Example 3.5 (continued) p-Value for a Two-Tail Test
Example 3.6 (continued) p-Value for a Two-Tail Test of Significance
Example 3.7 Estimating Expected Food Expenditure
Example 3.8 An Interval Estimate of Expected Food Expenditure
Example 3.9 Testing Expected Food Expenditure
Example 4.1 Prediction in the Food Expenditure Model
Example 4.2 Goodness-of-Fit in the Food Expenditure Model
Example 4.3 Reporting Regression Results
Example 4.4 Using the Linear-Log Model for Food Expenditure
Example 4.5 Heteroskedasticity in the Food Expenditure Model
Example 4.6 Testing Normality in the Food Expenditure Model
Example 4.7 Influential Observations in the Food Expenditure Data
Example 4.8 An Empirical Example of a Cubic Equation
Example 4.9 A Growth Model
Example 4.10 A Wage Equation
Example 4.11 Prediction in a Log-Linear Model
Example 4.12 Prediction Intervals for a Log-Linear Model
Example 4.13 A Log-Log Poultry Demand Equation
Example 5.1 Data for Hamburger Chain
Example 5.2 OLS Estimates for Hamburger Chain Data
Example 5.3 Error Variance Estimate for Hamburger Chain Data
Example 5.4 R 2for Hamburger Chain Data
Example 5.5 Variances, Covariances, and Standard Errors for Hamburger Chain
Data
Example 5.6 Interval Estimates for Coefficients in Hamburger Sales Equation
Example 5.7 Interval Estimate for a Change in Sales
Example 5.8 Testing the Significance of Price
Example 5.9 Testing the Significance of Advertising Expenditure
Example 5.10 Testing for Elastic Demand
Example 5.11 Testing Advertising Effectiveness
Example 5.12 Testing the Effect of Changes in Price and Advertising
Example 5.13 Cost and Product Curves
Example 5.14 Extending the Model for Burger Barn Sales
Example 5.15 An Interaction Variable in a Wage Equation
Example 5.16 A Log-Quadratic Wage Equation
Example 5.17 The Optimal Level of Advertising
Example 5.18 How Much Experience Maximizes Wages?
Example 5.19 An Interval Estimate for exp(2/10)
Example 5.20 An Interval Estimate for 1 / 2
Example 5.21 Bootstrapping for Nonlinear Functions g ( ) = exp( /10) and g ( , )
1 2 2 2 1 2
= 1 /2
Example 6.1 Testing the Effect of Advertising
Example 6.2 The F-Test Procedure
Example 6.3 Overall Significance of Burger Barns Equation
Example 6.4 When are t-and F-tests equivalent?
Example 6.5 Testing Optimal Advertising
Example 6.6 A One-Tail Test
Example 6.7 Two (J = 2) Complex Hypotheses
Examples 6.2 and 6.5 Revisited
Example 6.8 A Nonlinear Hypothesis
Example 6.9 Restricted Least Squares
Example 6.10 Family Income Equation
Example 6.11 Adding Children Aged Less Than 6 Years
Example 6.12 Adding Irrelevant Variables
Example 6.13 A Control Variable for Ability
Example 6.14 Applying RESET to Family Income Equation
Example 6.15 Forecasting SALES for the Burger Barn
Example 6.16 Predicting House Prices
Example 6.17 Collinearity in a Rice Production Function
Example 6.18 Influential Observations in the House Price Equation
Example 6.19 Nonlinear Least Squares Estimates for Simple Model
Example 6.20 A Logistic Growth Curve
Example 7.1 The University Effect on House Prices
Example 7.2 The Effects of Race and Sex on Wage
Example 7.3 A Wage Equation with Regional Indicators
Example 7.4 Testing the Equivalence of Two Regressions: The Chow Test
Example 7.5 Indicator Variables in a Log-Linear Model: The Rough Approximation
Example 7.6 Indicator Variables in a Log-Linear Model: An Exact Calculation
Example 7.7 The Linear Probability Model: An Example from Marketing
Example 7.8 An Application of Difference Estimation: Project STAR
Example 7.9 The Difference Estimator with Additional Controls
Example 7.10 The Difference Estimator with Fixed Effects
Example 7.11 Linear Probability Model Check of Random Assignment 338
Example 7.12 Estimating the Effect of a Minimum Wage Change: The DID Estimator
Exploring the Variety of Random
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