Ecs3706 exam pack
List any three uses of econometrics (3)
1. Describing economic reality
2. Testing hypothesis about economic theory
3. Forecasting future economic activity
Briefly explain the meaning of the following
(i)Regression analysis
Regression analysis: a statistical technique that a...
, List any three uses of econometrics (3)
1. Describing economic reality
2. Testing hypothesis about economic theory
3. Forecasting future economic activity
Briefly explain the meaning of the following
(i)Regression analysis
Regression analysis: 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, called the independent (or
explanatory) variables, through the quantification of a single equation.
A regression result, no matter how statistically significant, cannot prove causality. All regression
analysis can do is test whether a significant quantitative relationship exists.
(ii)The estimated regression equation
A quantified version of the theoretical regression equation. Estimated regression coefficients:
empirical best guesses of the true regression coefficients and are obtained from a sample of the Xs and
Ys; denoted by beta hats.
(iii)Total, explained and residual sum of squares.
Total sum of squares (TSS): the squared variations of Y around its mean
as a measure of the amount of variation to be explained by the regression.
Explained sum of squares (ESS): measures the amount of the squared
deviation of Yi from its mean that is explained by the regression line.
Residual sum of squares (RSS): the unexplained portion of the total sum
of squares. OLS minimizes the RSS and therefore maximizes the ESS
Carefully distinguish between R2 and Adjusted R2
R2 is the ratio of the explained variation compared to the total variation; thus, it is
interpreted as the fraction of the sample variation in y that is explained by x.It is a called the
coefficient of determination.
R2=SSE/SST=1-(SSR/SST)
Whilst the Adjusted R squared is R-squared adjusted for the excess of the number of observations
over the number of coefficients estimated.
Can the adjusted R-squared be misused in regression analysis?
(YES)-R-bar-squared should not be used as the sole measure of the quality of an equation at the
expense of economic theory or statistical significance.
QUESTION 2
(a) State four criteria for determining whether a given variable belongs in an equation (4)
1. Theory: Is the variable’s place in the equation unambiguous and
theoretically sound?
2. t-test: Is the variable’s estimated coefficient significant in the expected direction?
3. R-bar-squared: Does the overall fit of the equation (adjusted for
degrees of freedom) improve when the variable is added to the
equation?
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