Introduction to Econometrics

Instructor: Nguyen Thu Hang

[email protected]
 Outline
• Chapter 0: Introduction to Econometrics (LEC 1)
• Chapter 1: Simple Regression (LEC 2, 3, 4)
(Gujarati: Chapter 2,3,4,5)
• Chapter 2: Multiple Regression (LEC 5, 6, 7)
(Gujarati: Chapter 7,8)
• Chapter 3: Dummy Variable Regression Models (LEC 8)
(Gujarati: Chapter 9)
• Chapter 4 : Multicollinearity (LEC 9)
(Gujarati: Chapter 10)
• Chapter 5: Heteroscedasticity (LEC 10)
(Gujarati: Chapter 11)
• Chapter 6: Autocorrelation (LEC 11)
(Gujarati: Chapter 12)
Chapter 7 : Model specification (LEC 12)
(Gujarati: Chapter 13)
Reading papers + Replicating empirical Research + Presentation (LEC 13, 14, 15)

Nguyen Thu Hang-BMNV, FTU CS2 2

 Assessment
• Performance: 10%
• Mid-term test + assignments: 30%
• Final term test : 60%

Nguyen Thu Hang-BMNV, FTU CS2 3

 Course materials
1. Basic Econometrics
by Gujarati, Fourth Edition

2. Introductory Econometrics- A modern

approach
by Jeffrey M. Wooldridge

Nguyen Thu Hang-BMNV, FTU CS2 4

 Some keywords
• Regression
• Dependent variables
• Independent variables.
• Data
• Empirical research
• Significant/ Significance
• Correlation

Nguyen Thu Hang-BMNV, FTU CS2 5

 Examples of empirical research
 This thesis examines the relationship between the probability
of financial distress and some specific financial ratios in order to
identify internal factors causing distress for firms. (Phu Kim Yen,
K49 CLC)
• Findings: Size has negative coefficients which are statistically
significant at significance level of 1% in all estimations. This
finding is consistent with previous study of Ohlson (1980). The
author concludes that size affect the probability of financial
distress of Vietnamese listed firms, especially those on HOSE. In
reality, large-cap companies often have more power in its trading
position with counterparties as well as more approaches to
financing resources. Therefore, it is easier for them to weather
unexpected downturns.

Nguyen Thu Hang-BMNV, FTU CS2 6

 Examples of empirical research
This thesis analyzes determinants of commercial banks’
net interest margin in Vietnam (Hoang Trung Khanh,
K49CLC).
• Findings: Operating expense has positive coefficients
which are statistically significant at the significance level
of 1% in all estimations. This finding is consistent with
previous studies of Abreu and Mendes (2003) and
Maudos and Fernández de Guevara (2004). We conclude
that operating expense affect Vietnamese banks’ NIM
positively and accept hypothesis H1 established earlier.
As operating expense gets larger, banks would tend to
pass on the increasing cost of operating inefficiency to
the public in the form of higher loan interest, which in
turn would result inNguyen
a higher value
Thu Hang-BMNV, FTU CS2of NIM. 7
 Introduction to Econometrics
The Nature and Purpose of Econometrics
1. Why do you need to learn Econometrics?
2. What is Econometrics? What will you
learn from the course?
3. How do you learn? Methodology of
Econometrics
4. Terminology and notation
5. Types of data

Nguyen Thu Hang-BMNV, FTU CS2 8

1. Why do you need to learn Econometrics?

Nguyen Thu Hang-BMNV, FTU CS2 9

2. What is Econometrics?
• Econometrics = “economic measurement”.
• “Econometrics may be defined as the social science in
which the tools of economic theory, mathematics, and
statistical inference are applied to the analysis of
economic phenomena” (Goldberger 1964).

Nguyen Thu Hang-BMNV, FTU CS2 10

In this course you will:

Nguyen Thu Hang-BMNV, FTU CS2 11

 3. Methodology of Econometrics
1. Statement of theory or hypothesis .
2. Specification of the mathematical model of the
theory
3. Specification of the statistical, or econometric,
model
4. Collecting the data
5. Estimation of the parameters of the econometric
model
6. Hypothesis testing
7. Forecasting or prediction
8. Using the model for control or policy purposes.
Example
1. Statement of Theory or Hypothesis
• Keynes states that on average, consumers increase
their consumption as their income increases, but not
as much as the increase in their income (MPC < 1).

• MPC= marginal propensity to consume

Example
2. Specification of the Mathematical Model of
Consumption (single-equation model)

Y = β1 + β2X 0 < β2 < 1 (1)

Y = consumption expenditure (dependent
variable)
X = income (independent or explanatory variable)
β1 = the intercept
β2 = the slope coefficient

• The slope coefficient β2 measures the MPC.

Example
Geometrically,

• Geometrically,
Example
3. Specification of the Econometric Model of Consumption
• Other variables can affect consumption expenditure: size of family,
ages of the members in the family, family religion  the inexact
relationships between economic variables
• To allow for the inexact relationships between economic variables,
(1) is modified as follows:

• Y = β1 + β2X + u (2)

• where u = the disturbance, or error, term, a random (stochastic)

variable that has well-defined probabilistic properties.
• u may well represent all those factors that affect consumption but
are not taken into account explicitly.
Example
• (2) is an example of a linear regression model, i.e., it hypothesizes
that Y is linearly related to X, but that the relationship between the
two is not exact; it is subject to individual variation. The econometric
model of (2) can be depicted as shown in Figure 2.
Example
4. Obtaining Data
• Y = personal consumption expenditure (PCE)
• X = gross domestic product (GDP)
Example
5. Estimation of the Econometric Model
• Regression analysis is the main tool used to obtain the
estimates. We obtain the estimates
β1 = −184.08 and β2= 0.7064
Yˆ = −184.08 + 0.7064Xi (3)

 An increase in real income of 1 dollar led, on average,

to an increase of about 70 cents in real consumption.
Example
The data are plotted in Figure I.3
Example
6. Hypothesis Testing
• Keynes expected the MPC to be positive but less than 1.
• In our example MPC= 0.70  we must enquire whether
this estimate is sufficiently below unity. In other words, is
0.70 statistically less than 1? If it is, it may support
Keynes’ theory.
• Such confirmation or refutation of economic theories on
the basis of sample evidence is based on a branch of
statistical theory known as statistical inference
(hypothesis testing).
Example
7. Forecasting or Prediction
• To illustrate, suppose we want to predict the mean
consumption expenditure for 2015. The GDP value for
2015 was 7269.8 billion dollars consumption would be:

Yˆ2015 = −184.0779 + 0.7064 (7269.8) = 4951.3

8. Use of the Model for Control or Policy Purposes

• Suppose the government decides to propose a
reduction in the income tax. What will be the effect of
such a policy on income and thereby on consumption
expenditure and ultimately on employment?
4. Terminology and notation
Unless stated otherwise:
• The letter Y will denote the dependent variable
• The X’s will denote the independent variables, Xk being the
kth explanatory variable.
• The subscript i or t will denote the ith or the tth observation
or value.
• N will denote the total number of observations or values in
the population,
• n will denote the total number of observations in a sample.
• u or e will denote the random error or stochastic

Nguyen Thu Hang-BMNV, FTU CS2 23

4. Terminology and notation
• In the literature the terms dependent variable
and explanatory variable are described
variously. A representative list is:

Nguyen Thu Hang-BMNV, FTU CS2 24

5. Types of data
• There are three types of data empirical
analysis: time series, cross-section, and panel
data.
• Time series data: a set of observations on the
values that a variable takes at different times.
It is collected at regular time intervals, such as
daily, weekly, monthly, quarterly, annually. Ex:
weekly stock return, monthly interest rate,
GDP growth, CPI and so on.

Nguyen Thu Hang-BMNV, FTU CS2 25

5. Types of data
• Cross-section data: data on one or more
variables collected at the same point in time.
Ex: the census of population conducted by
the Vietnam General Statistics Office every 10
years. Profits of listed firms in 2014.
• Panel data/ Pooled data: set of combination of
time series and cross-section.

Nguyen Thu Hang-BMNV, FTU CS2 26

Example of panel data

Nguyen Thu Hang-BMNV, FTU CS2 27

The accuracy of data
The results of research are only as good as
the quality of the data.

• If in given situations researchers find that the

results of the research are “unsatisfactory”,
the cause may be not that they use the wrong
model but that the quality of the data was
poor.

Nguyen Thu Hang-BMNV, FTU CS2 28

 Measurement Scales of Variables
• Four broad categories: ratio scale, interval scale, ordinal
scale and nominal scale.
• Ratio scale: GDP growth rate, interest rate, ROE. Most
economic variables belong to this category.
• Interval scale: the distance between two time periods,
say (2000-1995)
• Ordinal scale: income class (upper, middle, lower),
grading systems (A,B, C grades)
• Nominal scale: gender (male, female), marital status
(married, unmarried, divorced, separated)
Nguyen Thu Hang-BMNV, FTU CS2 29
Introduction of Stata

Nguyen Thu Hang-BMNV, FTU CS2 30

 Assignments
• State your hypotheses
• Collect data.
• Download Stata
• Input your data in Stata

Nguyen Thu Hang-BMNV, FTU CS2 31