B2 Econometrics Fall 2011

Department of Statistics

B2 - Econometrics About the course

Basic information
Course: Econometrics 7,5 hp, Fall 2011 Course Code: 2ST092 Lars Forsberg, PhD Ekonomikum Room B309, Lars.Forsberg@statistik.uu.se Xijia Liu, PhD Student Room E339 xijia.liu@statistik.uu.se Gujarati, Porter: Basic Econometrics, 5th edition. Sydsaeter and Hammond: Essential Mathematics for Economic: Analysis, 3rd ed. Prentice Hall. 28-Oct-2011, 08.00 12.00, Polacksbackens Aula. Mandatory registration, on studentportalen, no later than 16-Oct-2011. 07-Dec-2011, 08.00 12.00, Bergsbrunnagatan Room 2. Mandatory registration, on studentportalen, no later than 25Nov-2011.

Lecturer:

Teaching assistant

Textbook: Recommended reading

Exam: Supplementary exam:

Schedule: Please see the separate document: B2 Econometrics - Fall 2011 - Schedule.pdf

Introduction
This document will give the student a brief overview of what the class will be about, how it will be given, what to expect from the class and what is expected from the student. The student will also find information about home work assignments, examination etc.

The classes
The material in the course is presented in 15 classes, where each class is 2*45 min with a 15 min break in the middle. Exact dates and times are given in the schedule. Students are expected to attend the classes and to arrive in time. Classes start 15 minutes pass the hour. The default clock is the one in that particular class room. B2 - Econometrics Fall 2011 About the Course Sida 1

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Communication
The main tools for teacher-student communication outside of class will be: Email and PING PONG Email: In order to recieve email you have to have your email adress registered in the system. Please check to make sure you have a valid email adress registered. PING PONG is the main tool for distribution of material of all kinds. On the course page on PING PONG you will find everything you need, such as: This document The schedule Home work assignments Recommended exercises Old exams Etc You are expected to log in regurlary and check whether some new posting have been made. It is your own responsibility to keep yourself informed about these things. The only exception from this rule is if and when the schedule is changed. If the schedule is changed I will send an email to all registrered participants explaining the change and this email will have the new schedule attached. Please update your personal calendars immidiately if and when this happens to avoid any problems.

Student participation
Students are expected to participate in the discussion in the class. I will continuously ask questions to the class and are expected to answer. It is not important whether you answer correctly or not, just that you answer. Why is that not important? Well, these questions have several purposes: To activate students so that you do not just sit there passively. To encourage students to try to find answers themselves and not just expect to being served all the answers. To give the lecturerer a clue whether you follow or not. Maybe I present things in a bad way, to complicated, to quickly etc. It is the responsibility of each and every student to make sure that you understand the material being presented. If not, let me know. About questions in general and student question in particular: It is my sincere belief that that is no such thing as a stupid question! Actually, by definition, there cannot be a stupid question. There can be only stupid answers.

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In a sense: acknowledging a current lack of knowledge or understanding, is a very good first step to remedy that situation. Furthermore, it is expected from each and every student to accept, and respect, the level of knowledge and understanding of every other student at any given point in time, and not make any kind of comments, verbal or non-verbal, in this respect. It is important to realize that the course is designed to teach you the material, not to check whether you already know it.

Teaching styles
In education, there can be distinguished two types of processes: Screening process Value-adding process A screening process implies that teaching is standardized and students have to do most of the work themselfes, and only the best make it, hence one screen out the best and brightest. The purpose of a value adding process is to teach the student the material in the course, no matter the preliminary knowledge or speed at which the student learns. The main objective is that, at the end of the course, each and every student should have reached the course objectives. At this department, and hence in this course, we apply the Value-adding process. In a value-adding teaching process a dialogue between the students and the teacher is of crucial importance. As a lecturer, I cannot find the level to start at, at what pace I should move forward, if I do not know what you know, and do not know. So, you must not be afraid to ask if you do not follow. Now, that being said, when you wonder about something: some notation, or what ever, you should ask me and not your fellow students. To make it very clear: In class, I do not tolerate any talking among students! Period. If something is not clear to you, ask me, and I will explain it again, in another way etc, be not afraid to look stupid, the most stupid thing you can do is to leave the class still wondering about something. Be not afraid to, sort of, waste you fellow students time by asking. Most likely, your fellow students will be thankful, since they might have been wondering the same thing, but did not dare to ask

Preliminaries
Even though some of you have studied econometrics before, you should know that I assume that the material is new to every student. It is a first course in econometrics, and if you have B2 - Econometrics Fall 2011 About the Course Sida 3

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studied this subject before there will be some repetition. It has been said: The price you pay for being well educated, is that you often get bored. Students who have recently studied the A-course with focus on Regression and Time Series analysis, will notice that much of the material is the same. So, what will be new? In this course we go through all models and techniques in more detail. Not just, this is how you run a regression and this is how you interpret the results. We derive the formulas and connect them to underlying probability and statistical theory. In this course, we also go much more into detail in every aspect of ecnometrics. You will learn to think econometrics, how to derive your own estimators, learn the methodology to contruct models and estimators, etc. That being said, it is assumed that the student know the basic probability and inference theory. See Gujaratis book Basic Econometrics, Appendix A: A review of some statistical concepts for a good summary of the basic material. You have to be familiar with this material in order to follow the course. Even though this is assumed, I will briefly review the probability and statistical theory when it is used. This is in line with the principle of starting with the known, and move to the not yet known. These reviews of theory are done in order for the student to make the connection between basic probability and statistical theory, and the application thereof in ecnonometrics, make the theory active in the students mind in order to connect the details to the big picture. Thus, view it as repetition, nothing else.

Class presentation and handouts

For the presentations in class I will use different tools and formats : The black board/ white board Powerpoint slides Direct use of Eviews Plastic slides The black board/ white board will be the primary channel for presenting and deriving main results in the course, such as formulas. This because of It allows for a great deal of flexibility and adjustment to student questions. It keeps the tempo at a reasonable level, basically not going to fast Powerpoint slides will also be used. This format is more suitable for graphical presentation and bullet point lists. Whenever a powerpoint presentation is performed in class, copies of the slides will be downloadable on the PING PONG platform. The material written on the white/black board will not be downloadable anywhere. You have to take notes the old-fashioned way. There is an old adage saying: if your hand do not write it, you brain does not record it. One simply learn better taking notes

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At times I will hook up the computer to the big screen and use the software Eviews live, to give you a immidiate connection between theory and applied work. At times I will use plastic slides for short presentations.

Computer rooms
Students registrered for this course have access to the computer rooms at the department. In this course we will mainly use the econometric software Eviews 7.0. This software is installed in the following computer rooms: H319 H325 and H326. If you have problems with access to the labs or with the computers or with logging on to you account, or with remote desktop connection etc, do not hesitate to contact: Pierre Hjlm, Room A342 Email: Pierre.Hjalm@im.uu.se Phone: +46 (18) 471 10 44 It is his job to make sure everything works.

Exercises in Econometrics
Understanding and skill are two different things. Meaning that during the class or when you read the book, you might think that you understand the material. But the goal of the course is for you not only to understand, but to be able to use the different methods and techniques. And, more importantly in practical work, also to know what technique or model to use, given a specific situation. This skill can be acquired only through extensive problem solving. In every chapter in Gujarati there are exercises and problems. I strongly recommend that you work through these exercises. Solutions to some of these exercises will be presented in the lectures. On PING PONG there are also Exercisis in Econometrics with solutions, again, you are strongly recommended to work through these exercies. There are also old exams there to review, which might be of interest.

Home Work Assignments

There are two home work assigments (HWAs) in this course. The objective of these HWAs are to give the student more hands-on experience of econometric modelling and problem solving. B2 - Econometrics Fall 2011 About the Course Sida 5

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The HWAs should be done in groups of 2, maximum 3 students. Written reports should handed in. Deadline for handing in the assignments is given in the schedule. The HWA will be downloadable on the PING PONG platform on the day when they are supposed to be handed out according to the schedule. Thus, note that there will be no physical hand out. You have to download it and print it yourself. Note that you have to pass the HWAs in order to get credits and a grade on this course.

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Grades on the HWAs

The HWAs will be graded with a binary outcome: PASS or NOT YET PASS There are no other grades, even though I might write comments on the reports when grading it. In the official documentation of the course the only information will be whether you have PASSED or NOT YET PASSED. Whether you pass or not the first time you hand in the HWA will have no effect on the final grade on the course. This is so due to the principle of learning by doing. You learn the best when you DO, and what one usually remember, and hence learn for life, is what you had to RE-DO. So, even though I do no encourage you to not do you best on the HWA the first time you hand it in, you should not be afraid of making a mistake. As noted above, not passing first hand-in will not affect your final grade. If lot of students have a hard time solving a particular task, it is very likely that I have failed in explaining it well enough. So, if there are some mistakes/ errors made by several groups of students, I will go through that particular topic again before the deadline of the second time hand-in. If you get a NOT YET PASSED grade on the HWA, this means, of course, that you have to redo some part of it and hand it in again. Important to note here: When you hand in the HWA the second time it MUST BE A FULL REPORT! There must be no trace of the previous mistakes you made in the first version. You will have to submit new versions until it is a good, stand-alone report. In addtion to the full report, there should be a SEPARATE sheet of paper where you comment on the changes that you made. The HWAs will require the use of the statistical software Eviews.

Eviews introduction
In this course we will use the econometric software Eviews. An Eviews introduction is scheduled in the class. It is a good idea that you check out this software ahead of the introduction so that you do have a feeling for it. Again, Eivews is installed on the computers in the computer labs H319, H325 and H326. Also, ahead of the Eviews introduction class, please make sure you can log on to your student account. If not, contact Pierre Hjlm to get it to work. B2 - Econometrics Fall 2011 About the Course Sida 7

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Written exam
There will be two opportunities to do the written exam, a (first) written exam, and a (second) supplementary written exam. (For time and place for the written exams: See the schedule.) For both exams, the following applies: You will be allowed to have : ONE DICTIONARY ONE CALCULATOR COLLECTION OF FORMULAS AND STATISTICAL TABLES As mentioned above, old exams can be downloadable from PING PONG. See Documents, and then the folder Old exams.

Grades
There are two sets of grades for this course: The Swedish grading system (VG, G and U) and the ECTS system (A-F). Each and every student can choose by which system he/she will be graded by. The grade on the course will be based solely upon the result of the written exam. To get a Pass on the HWAs is a nessecary condition for getting a grade on the course, but the HWAs will not in any way influence the final grade. In the official records, there will simply be an OK on the HWAs. Also, in the formal records, there will be no distinction whether you pass on the first written examination or the supplementary (second) written examination. The procedure works like this: If you reach minimun level of points on the first exam (say 50% of total), then you have passed the written examination test, and the result of the exam will determine your grade, you are done, your grade is set, and you cannot do the supplementary exam. If however, you do not reach the minimum number of points on the first exam, that is, you get a not pass grade (U or ECTS: F), then you get a second chance to do the written examination, ie, you can write the supplementary exam. If you do that, and reach minimum number of points to Pass, then you are done, and your ECTS grade will be based on that exam. In the formal documentation of the course, there will be no information whatsoever about whether you passed on the first or the second exam. This might have some implications for the get-a-good-grade-tactics employed by some students. Such as, at the first exam, if they feel that this particular written exam is to hard to achieve the grade they want, they can hand in the solution blank, and thus fail the first attempt, and hence get a second chance to get a good grade. This form a tactics is implied by the regulations and thus allowed. However, it is not recommended since there is no guarantee that the second exam will be any easier. It is true however, that the student will have some more time to study for the B2 - Econometrics Fall 2011 About the Course Sida 8

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second exam. But bear in mind, that if the student fail to pass on the supplementary exam, there is no opportunity to pass the course until next semester.

How to approach the material

Obviously, all of you are skilled in the area of study technique, otherwise you would not be in this course. Thus, this section might be superflous to most of you. That being said, it is my experience that students can have difficulty studying statistics and econometrics. The reason for this is that they previously mostly have studied reading courses. Math and statistics is somewhat different. From a pedagogical perspective, one need to apply what is called learning by problem solving. There is no way you can learn statistics or econometrics just by reading. You must solve problems. You cannot just memorize the formulas, you must understand them, and so on. So, the following is an outline of some proposed guidelines on how to study the material in this course. Some general hints are given. Of course, these hints are only guidelines, and represent just one way to approach the material. In general , the lectures will be based on this basic principle of going from the (presumed) known, to the (presumed) unknown, and from the big picture (intuition), to the details (the algebra).

General hints
It is very easy to loose the big picture in dealing with the methods in this course. Below are some hints on how you can approach the material in order to be able to see the forest for the trees.

Big picture versus details

You should try to understand the principle of the methods, get an intuition of what is beeing done, before you do into the (algebraic) details. Some questions you can ask the text: What exactly is the purpose of this method? (What are we doing? Why are we doing it?) Whats the basic principle of this estimator, method? Whats the intuition behind this estimator, method? How exactly is this done? (Get into the algebraic details.) What is the similarites/ differences between this method/estimator/procedure, and other dito dealing with the same issue? When dealing with distributions, in the context of confidence intervals and tests, sketch a picture of the distribution. When dealing with tests, always draw the distribution, and point out the critical value(s) and the rejection region(s).

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Overview of Topics
In this course we use the book: Basic Econometrics 5th edition, by Gujarati. Below you find a brief outline of the topics in each chapter that will be covered in the course. Chapter 1: The nature of regression anaysis The concept of linear regression Correlation vs Regression Statistical vs Deterministic relationsships Terminology and notation Chapter 2: Two-variable regression analysis: some basic ideas Population regression function (PRF) Sample regression function (SRF) Linearity in variables Linearity in parameters Chapter 3: Two-variable regression model: The problem of estimation OLS-estimation. Point estimates of parameters. Coefficient of determination. Chapter 4: The normality assumption (CNLRM) Normality assumption of the residuals. Properties of OLS-estimators under normality assumption. Distributions related to the normal t, chi-squared, F. Maximun likelihood estimation. Chapter 5: Two variable regression: Interval estimation and hypothesis testing Interval estimation of parameters (confidence intervals). Hypothesis testing of parameters (t-test, F-test). Mean predicion. Individual predicion. Normality tests. Chapter 6: Extensions of the two-variable linear regression model Regression through the origin Functional forms Elasticity Log-log models Log-lin models Lin-log models Reciprocal models B2 - Econometrics Fall 2011 About the Course Sida 10

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Chapter 7: Multiple regression analysis: The problem of estimation Three variable model estimation Partial regression coefficients R2 and adjusted R2
Chapter 8: Multiple regression analysis: The problem of inference

T-test in multiple regression framework F-test Restricted least squares Test for structural stability Testing linear restrictions (F-test) Likelihood ratio, Wald and Lagrange multiplier tests

Chapter 9: Dummy variable regression models

The nature of dummy variables Regression using dummy variables Interaction effects using dummy variables Seasonal analysis Piecewise linear regression

Chapter 10: Multicolliniarity

What is multicolliniarity The consequenses of multicolliniarity How to detect multicolliniarity Remedial measures

Chapter 11: Heteroscedasticity

What is heteroscedasticity? The consequenses of heteroscedasticity GLS Detection of heteroscedasticity Remedial measures

Chapter 12: Autocorrelation

Autocorrelation The consequenses autocorrelation Estimation allowing for autocorrelation Detection of autocorrelation Remedial measures

Chapter 13: Econometric modeling

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Errors of measurement

Chapter 14: Nonlinear regression models

Linear and non-linear models

Chapter 15: Qualitative Response Regression models

Linear probability model Logit model Probit model

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