Applied Econometrics

Applied EconometricsSecond edition

Dimitrios Asteriou and Stephen G. Hall

Applied Econometrics

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INTRODUCTION

1. What is Econometrics?2. The Stages of Econometric Work

Applied Econometrics

What is Econometrics?Econometrics means measurement (metrics in

greek) in economics.The importance of applied work in economics is

increasing constantly.Theory suggests that X affects Y but is this true

or not?This is the work of the applied econometrician.

Applied Econometrics

What is Econometrics?• Examples of problems that may be

tackled by an Econometrician(a)Modelling long-term relationships among

prices and interest rates.(b)Examining the effect of inflation in

unemployment rates(c) Examining the effect of disposable

income on consumption

Applied Econometrics

What is Econometrics?• Examples of problems that may be

tackled by an Econometrician (continued)

(a) Determining the factors that affect GDP per capita growth

(b) Testing the validity of the CAPM and APT theories

(c) Forecasting the correlation among the returns and the stock indices of two countries.

Applied EconometricsThe Stages of Applied Econometric Analysis

Economic Theory

Econometric Model Data

Model Estimation

Specification Testing and Diagnostics

Is the Model Adequate?

No Yes

Test any hypothesis

Use for Predictions and Policy Making

Applied Econometrics

The Structure of Economic Data

• There are three different types of economic data

• TIME SERIES• CROSS SECTIONAL• PANEL DATA

Applied Econometrics

The Structure of Economic Data• Time Series Data• Examples: GDP, Unemployment, Inflation,

Stock Prices, etc• Vectors or Columns (like in a spreadsheet)• Frequencies: Yearly, Bi-annually, Quarterly,

Monthly, Weekly, Daily, Hourly.• Lots of different values for different time

periods for one country, state, city, market.

Applied Econometrics

The Structure of Economic Data• Cross-Sectional Data• Examples: GDP, Unemployment, Inflation,

Stock Prices, etc. • Vectors or Rows (like in a spreadsheet)• Frequencies: Yearly, Bi-annually, Quarterly,

Monthly, Weekly, Daily, Hourly.• Lots of different values for different countries,

states, cities, markets, but for one time period only.

Applied Econometrics

The Structure of Economic Data• Panel Data• A combination of time series and cross-sectional data.• Examples: GDP, Unemployment, Inflation, Stock Prices,

etc. • Matrices (columns and rows to make an n times m matrix)• Frequencies: Yearly, Bi-annually, Quarterly, Monthly,

Weekly, Daily, Hourly.• Lots of different values for different countries, states, cities,

markets, and for different time periods.

Applied EconometricsThe Structure of Economic

Data - Notation• Time series: Yt, t=1990, 1991, …, 2012• Cross-Sectional: Yi, i=1, 2, 3, …, 40• Panel Data: Yit, i and t defined as above.

• It is common to denote each observation by the letter t and the total number of observations by T for time series data, and to denote each observation by the letter i and the total number of observations by N for cross-sectional data.

Applied Econometrics

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The Structure of Economic Data – Quantitative vs Qualitative

• The data may be quantitative and qualitative.

• Quantitative (e.g. GDP per capita, exchange rates, stock prices, unemployment rates)

• Qualitative (e.g. Day of the week, gender, level of education)