MEP-DD

Muhammad Edhie Purnawan, MA, Ph.D

Tutorial 1 Econometrics
Two-Variable Regression Analysis
Prepared by Rafiazka Millanida H. rafiazka.mh@gmail.com

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Introduction to EVIEWS Exercise

Understanding Econometrics
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 Econometrics is based upon the development of statistical methods for estimating economic relationships, testing economic theories, and evaluating and implementing government and business policy.

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Reviewing Methodology of Econometrics

Classical econometric methodology proceeds along the following lines:
1. 2. 3. 4. 5. 6. 7. 8. Statement of theory or hypothesis. Specification of the mathematical model of the theory Specification of the statistical, or econometric, model Obtaining the data Estimation of the parameters of the econometric model Hypothesis testing Forecasting or prediction Using the model for control or policy purposes.

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Differing Economic Data

Cross sectional data Consists of a sample of variety of units taken at a given point in time Ex: census of populatio conducted by the Census Bureau every 10 years Time series data Consists of observations on a variable or several variables over time. Ex: stock prices Panel Data Data are elements of both time series and crosssection data. Ex: Consumer Price Index (CPI) for several countries for 19731997

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Interpreting Regression
Regression analysis is concerned with the study of the dependence of one variable, the dependent variable, on one or more other variables, the explanatory variables, with a view to estimating and/or predicting the (population) mean or average value of the former in terms of the known or fixed (in repeated sampling) values of the latter.

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Contd
Case: The rate of change of money wages in relation to the unemployment rate. The historical data is an example of the celebrated Phillips curve relating changes in the money wages to the unemployment rate.
Why scattergram?
- It may enable the labor economist to predict the average change in money wages given a certain unemployment rate. - It may be helpful in stating something about the inflationary process in an economy, for increases in money wages are likely to be reflected in increased prices.

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Determining Regression
Statistical Versus Deterministic Relationships - statistical not functional or deterministic - random or stochastic (have probability distribution) - eg: The dependence of crop yield on temperature, rainfall, sunshine, and fertilizer, for example, is statistical in nature in the sense that the explanatory variables, although certainly important, will not enable the agronomist to predict crop yield exactly because of errors involved in measuring these variables as well as a host of other factors (variables) that collectively affect the yield but may be difficult to identify individually.

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Contd
Regression Versus Causation - A statistical relationship can never establish causal connection (Kendall and Stuart). - To ascribe causality, one must appeal to a priori or theoretical considerations. - eg: There is no statistical reason to assume that rainfall does not depend on crop yield. The fact that we treat crop yield as dependent on rainfall (among other things) is due to non-statistical considerations: Common sense suggests that the relationship cannot be reversed, for we cannot control rainfall by varying crop yield.

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Contd
Regression Versus Correlation
Correlation analysis aims to measure the strength or degree of linear association between two variables. Regression analysis try to estimate or predict the average value of one variable on the basis of the fixed values of other variables.

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Selecting Methods of Estimation

The three generally used methods of estimation: 1. ordinary least squares (OLS) 2. maximum likelihood (ML) 3. method of moment (MM) By and large, it is the method of OLS that is used extensively in regression analysis primarily because it is intuitively appealing and mathematically much simpler than the ML and MM

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EVIEWS Window
Title Bar

Main Menu

Command Window

Work Area

Status Line

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Workfile
1. Creating Workfile
File New Workfile Workfile Structure Type: - Unstructured/Undated - Dated/Regular Frequency
Annual Semi-annual Quarterly Monthly Daily : 1991 2011 : 1995:01 1995:02 : 1997:03 2007:04 : 2003:05 2011:12 : 2005:31 2011:250

- Balanced Panel

2. Saving Workfile

File Save As .... File Open Workfile

3. Opening Workfile

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Data
1. Entering Data:Manual a. By Command
- Make series/variable series series_name show series_name edit +/- Enter Data Type or paste data from microsoft excel

2. Entering Data:Import Option a. From Microsoft Excel

File Import Read File Type: Excel File Name: file_name Note: Variables in Excel start at B2. Excel must be closed before importing process.

b. By option
- Make series/variable Object New Object Type of Object: Series Name for Object: series_name or Quick Empty Group Series - Enter data Double click to the series/variable edit +/Type or paste data from microsoft excel

b. From Text
File Import Read File Type: Text-ASCII File Name: file_name

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Contd
3. Opening Data Group a. By Command
show series1_name series2_name

4. Plotting Data
a. By Command single graph: plot series1_name series2_name multiple graphs: plot(m) series1_name series2_name b. By option single graph: block series right click open as group view graph multiple series: single graph multiple graphs: block series right click open as group view graph multiple series: multiple graph

b. By option
block series right click open as group or quick show objects: series1_name series2_name

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Descriptive Statistics
1. Statistical Value a. By Command
stats series1_name series2_name

2. Correlation Matrix a. By Command

cor series1_name series2_name

b. By option
block series right click open as group view descriptive stats individual sample

b. By option
block series right click open as group view covariance analysis statistics: correlation

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Equation
quick estimates equation specification: series1_name c series 2_name
or

block series1_name c series 2_name right click open as equation proc series1_name c series 2_name
or

ls series1_name c series 2_name Object name name: eq01

or

equation eq01.ls series1_name c series 2_name

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Step of Regression
1.Hypothesis Testing
If null hypothesis isnt rejected hence independent variable isnt significant to dependent variable

2.Interpreting Regression Coefficient 3.R (R-squared) 4.Residual, Fitted, and Actual Value 5.Test for normality of Residual

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Running EVIEWS
Exchange Rate Gujarati (2003), p.33

1.
2. 3.

Open EVIEWS Program Open New Workfile Quick Empty Group (edit series), copy the data from excel.

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equation eq1.ls france c germany

Compare to given =5%

Compare to value of t-stat table

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Hypothesis Testing The model: France = o + 1_Germany + u Ho: Ha: 1 = 0 1 0

1
Prob. < 0.05: Ho (Null Hypothesis) is not rejected independent variable is significant to dependent variable.

Prob. > 0.05: Ho (Null Hypothesis) is rejected independent variable is not significant to dependent variable.
Prob. 0.0001 < 0.05 Ho (Null Hypothesis) is not rejected. Independent variable is significant to dependent variable.

Overview Application t-table n = 22 k=2 df = n-k = 20 = 10% t-table = 1.725 = 5% t-table = 2.086 = 1% t-table = 2.845 t-stat 4,997 > 2.845 or 2.086 or 1.725 4,997 > 2 Ho (Null Hypothesis) is not rejected. Independent variable is significant to dependent variable.

Introduction to EVIEWS Exercise

t-stat > t-table: Ho (Null Hypothesis) is not rejected independent variable is significant to dependent variable.
t-stat < t-table: Ho (Null Hypothesis) is rejected independent variable is not significant to dependent variable. Note: Since Eviews applies level of significance is 5% or = 5%, the rule of thumb regarding to t-stats will be for any regressions with more than n>20 and 0.05 level of significant, the critical value is 2. t-stats > 2: Ho (Null Hypothesis) is rejected. Independent variable is significant to dependent variable. t-stat < 2: Ho (Null Hypothesis) is not rejected independent variable is not significant to the dependent variable.

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t-table Degree of freedom: n-k

Two tail

One tail n = number of data k = number of parameter Or number of variable

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Interpreting Regression Coefficient France = 1.618887+ 2.185832Germany

If exchange rate of Germany increases by an average of 1 USD, exchange rate of france will increase by average of 1.618887 USD, ceteris paribus.

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R (R-squared)

The variance of independent variable (exchange rate of Germany) can explain 55.53% variance of the dependent variable (exchange rate of France).

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Residual, Fitted, and Actual Value

4
10 9 8 7

Graph shows the goodness of fit of the model. Actual value is close to estimated value or fitted value. The more closer the two are, residual is around zero.

1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 78 80 82 84 Residual 86 88 90 92 94 96 98

6 5 4

Actual

Fitted

View actual, fitted, residual actual, fitted, residual graph

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Normality Test JB Test is designed to track departures from the normal distribution of the OLS residuals. Ho: Ha: Disturbance terms are normally distributed. Ho is not true.

view residual diagnostics histogram-normality test

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Contd Prob. > 0.05: Ho (Null Hypothesis) is not rejected Disturbance terms are normally distributed. Prob. < 0.05: Ho (Null Hypothesis) is rejected Disturbance terms are not normally distributed. JB-stat < c2 table , the model is normally distributed. Prob 0.112846 > 0.05 ( = 5%) Ho (Null Hypothesis) is not rejected. Disturbance terms are normally distributed. JB-stat 4.363461 < 10.8508 ( = 5%; df=22-2=20) Ho (Null Hypothesis) is not rejected. Disturbance terms are normally distributed.

JB-stat > c2 table , the model is not normally distributed.

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c2 -table Degree of freedom: n-k

n = number of data k = number of parameter Or number of variable

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Regress data sales.xls using eviews as the previous.

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Assignment 1
Journal draft on two-variable regression analysis (Abstract, Introduction, Theoretical Framework, Data&Methodology, Model, Result, Conclusion, Bibliography) Due date: 3rd tutorial meeting

Further Readings
Gujarati, D (2003). Basic Econometrics 4th edition. New York: Mc Graw-Hill. Kennedy, P (2003). A Guide to Econometrics 5th edition. Oxford: Blackwell. Seddighi, Lawler, and Katos (2000). Econometrics: A Practical Approach. New York: Routledge.

For any inquiry regarding to the topics please text or email me. Thanks.