Assignment 1: Eviews Exercise

1. Simulation Study
(1) Data Generating Process

Y = β1 + X2 β2 + X3 β3 + X4 β4 + X5 β5 + e, e ∼ N (0T ×1 , σ 2 IT ) (1)

Suppose that T = 200, β1 = 5, β2 = 2, β3 = 3, β4 = β5 = 0 and σ 2 = 1.

(1.1) Generate the independent variables X2 , X3 , X4 and X5 from the standard normal
N (0T ×1 , IT ) independently.
(1.2) Generate the error term.
(1.3) Construct the dependent variable Y based on the equation (1).

(2) Now estimate the following regression equations

Model 1: Y = β1 + X2 β2 + e
Model 2: Y = β1 + X2 β2 + X3 β3 + e
Model 3: Y = β1 + X2 β2 + X3 β3 + X4 β4 + X5 β5 + e

Model 4: Y = X2 β2 + X3 β3 + e

where e ∼ N (0T ×1 , σ 2 IT ).
(2.1) Report R̄2 , SIC and AIC for Model 1, 2 and 3.
(2.2) Do those criterions support the same model? If not, why does this happen?
(2.3) In the estimated Model 4, are estimates for β2 and β3 close to the true values? What
happens to R2 ?

(3) Repeat (1) and (2) in the case of T = 10 given the same true values.