Applied Econometrics

Applied Econometrics
Second edition
Dimitrios Asteriou and
Stephen G. Hall
 Applied Econometrics
Applied Econometrics
SIMPLE REGRESSION

1. Introduction to the Classical Linear Regression

Model
2. The OLS Method of Estimation
3. The Overall Goodness of Fit
4. Hypothesis Testing
5. How to Estimate a Simple Regression in Eviews
6. Applications and Examples
 Applied Econometrics
Learning Objectives
• Compute the equation of a simple regression line from a
sample of data, and interpret the slope and intercept of
the equation.
• A full understanding of the simple OLS method of
estimation and discussion of the properties of estimated
coefficients.
• Computation of a standard error of the estimate and
interpretation of its meaning and its use in Hypothesis
Testing.
• Understanding and interpretation of the R2
 Applied Econometrics
Introduction
• Regression analysis is the process of constructing a
mathematical model or function that can be used to
predict or determine one variable by another variable.
• Key issue here is direction of causation of the two
variables, or which variable depends on the other.
• Therefore we have two cases of variables
dependent variables (usually denoted by Y)
independent or explanatory (usually denoted by X)
 Applied Econometrics

The Scatter Plot

X

300

250

200

150 X

100

50

0
0 20 40 60 80 100 120 140 160 180
 Applied Econometrics

Four Ways of Fitting a Line in the Data

• By eye
• Connecting the first with the last observation
• Take the average of the first two and the
average of the two last and connect
• Apply Ordinary Least Squares
 Applied Econometrics
Regression Models
Deterministic Regression Model:
Y=0+1X
Probabilistic Regression Model:
Y=0+1X+u
0 and 1 are population parameters
0 and 1 are estimated by sample
statistics b0 and b1
 Applied Econometrics
Equation of the Regression Line

Yˆ  b0  b1 X
where : b0 = the sample intercept
b1 = the sample slope
Yˆ = the predicted value of Y
 Applied Econometrics
Slope and Intercept of the
Regression Line
  X   Y 
  X  X Y  Y   XY  nXY  XY 
n
b  
 X  X   X n X
2 2 2

1 2

X 2
 X
n

 Y  X
b Y b X  n b n
0 1 1
Applied Econometrics

Least Squares Analysis

SSXY    X  X Y  Y    XY 
  X   Y 
n

X  X
2
 X
SSXX   
2

2
X n
SSXY
b1  SSXX

 Y  X
b  Y b X  n b n
0 1 1
 Applied Econometrics

• Why error term exists?

1. Omission of explanatory variables
2. Aggregation of variables
3. Model misspecification
4. Functional form misspecification
5. Measurement Errors
Applied Econometrics
Applied Econometrics
 Applied Econometrics
Excel Calculations (the easy way!)
• Step 1: go to the menu Tools/Data Analysis and choose the command
regression.
• Step 2: We are then asked to specify the Input Range, Output Range, and
a choice of including or not labels in the first row.
• Step 3: The Input Range is the columns that contain the data for Y and X
(i.e. we enter ‘$A$1:$B$21’ or simply select this area using the mouse).
• Step 4: The Output Range can be either a different sheet (not
recommended) or any empty cell in the current sheet (i.e. we might specify
cell F5).
• Step 5: Since we have chosen the labels in our selection we tick the box.
• Step 6: By clicking <OK> we obtain the display shown in Table 4.4.
Applied Econometrics
Excel Results

Applied Econometrics: A Modern 15

Approach using Eviews and
 Applied Econometrics

The Regression Line

X
300

250

200

150
X
Linear (X)
100

50

0
0 20 40 60 80 100 120 140 160 180
 Applied Econometrics

The Coefficient of Determination

The proportion of variability of the dependent
variable accounted for or explained by the
independent variable in a regression model.

It is called R2 and it takes values from 0-1.

17
 Applied Econometrics

Regression in Eviews (1) (1)

Step 1 Open EViews.

Step 2 Choose File/New/Workfile in order to create a new file.

Step 3 Choose Undated or Irregular and specify the number of

observations (in this case 20). A new window appears which
automatically contains a constant (c) and a residual (resid) series.
 Applied Econometrics

Regression in EViews (2)

Step 4 In the command line type:
genr x=0 (press enter)
genr y=0 (press enter)
which creates two new series named x and y that contain zeros
for every observation.
Open x and y as a group by selecting them and double clicking
with the mouse.

Step 5 Either type the data in EViews or copy/paste the data

from Excel®. To edit the series press the edit +/− button. After
finishing with editing the series press the edit +/− button again
to lock or secure the data.