Econometrics

"...Experience has shown that each of these three viewpoints, that of

statistics, economic theory, and mathematics, is a necessary, but not by
itself a sufficient, condition for a real understanding of the quantitative
relations in modern economic life. It is the unification of all three that is
powerful. And it is this unification that constitutes econometrics..."

economic theories are usually sharp and unambiguous

o models of demand, production, labor supply etc. specify
deterministic relationships
but, the model (any) is a simplifcation of reality
o it includes salient features of the relationship of interest
but leaves unaccounted for influences that are present but
regarded as unimportant

ultimate goal of the econometric model is to uncover the deeper causal

connections between dependent and independent variable

Regression analysis
is a statistical technique that attempts to explain movements in one variable,
the dependent variable, as a function of movements in a set of other
variables, the independent variables.

regression analysis is concerned with statistical relationships between

variables deterministic vs. stochastic relationship
statistical relationships between variables assumes working with
random/stochastic variables that have probability distribution
Finally, regression analysis is concerned with investigating the
dependence between dependent variable and one or more
independent variables
E(Y I Xi ) = _0 + _1Xi LINEAR REGRESION FUNCTION
were _0 i _1 are unknown, but fixed parameters which are called
regression parameters (coefficients).

Stohastic

U
represents every variables that are left out of the model, but have and impact on Y.
1 shortcomings in theory
2 availability of the data
3 variables of different importance
4 idiosyncrasies in the human behavior
5 measurement errors
6 simplicity
7 wrong functional form

Primary goal of the regression analysis is

Ordinary least squares (OLS)

(TSS) is equal to the explained sum of squares (ESS) and residual sum of squares
(RSS)

Finding min RSS

in general, what we need to do in order to find the minimum value of some function
1) first derivation of the function
2) equalize the obtained expression from the first step with 0
3) obtain the value of x

b1 and b0 are called estimators, but the number that you obtain after regress
command in Stata are estimates
so, estimator has a distribution and estimate that you obtain is just one scalar that
is "taken out" of the bunch of other estimates from particular distribution

The Classical Assumptions

1)the regression model is linear, is correctly specified, and has an additive error
term
2) the error term has a zero population mean
3) all explanatory variables are uncorrelated with the error term
4) observations of the error term are uncorrelated with each other
5) the error term has a constant variance (homoscedasticity)
6) no explanatory variable is a perfect linear function of any other explanatory
variable
7 the error term is normally distributed (optional assumption)