Dr. C. Ertuna 1

Required Textbook

“Econometrics: By Example"

Gujarati

Palgrave-Macmillian 2011

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Econometrics is set of 1.statistical and 2.mathematical tools to help to

a. prove or b. disprove

certain financial and economic i. propositions and ii. models.

What is Econometrics?

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We need to learn Econometric Techniques in order to analyze and understand financial and economic behavior in the markets.

Why do we learn Econometrics?

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How Does Econometrics Differ From Economic Theory?

• Economic theory: qualitative results — demand curves slope downward

• Econometrics: quantitative results — price elasticity of demand for milk = -0.75

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How Does Econometrics Differ From Statistics?

• Statistics: “summarize the data faithfully”; “let the data speak for themselves.”

• Econometrics: “ what do we learn from economic theory AND the data at hand?”

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What’s Metrics For?

• Estimation: What is the marginal propensity to consume?

• Hypothesis Testing: Do unions raise workers’ wages?

• Forecasting: What will Personal Savings be in 2001 if GDP is $9.2 trillion?

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Economists Ask: “What Changes What and How?”

•Higher Income, Higher Saving

•Higher Price, Lower Quantity Demanded

•Higher Interest Rate, Lower Investment

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Savings Versus Income

• Theory Would Assume an Exact Relationship, e.g., Y =X

0

1000

2000

3000

4000

5000

6000

24000 48000 72000 96000

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Slope of the Line Is Key!

• Slope is the change in savings with respect to changes in income

• Slope is the derivative of savings with respect to income

• If we know the slope, we’ve quantified the relationship!

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Never So Neat: Savings Versus Income

0

1

2

3

4

5

6

0 20 40 60 80 100 120

saving

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Yi Xi i

• We need to find best way to estimate (slope)

Econometrics helps us to find that “best way”.

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Using the Model for Prediction and Policy

Tests of Hypothesis

Specification Testing & Diagnostic Checking &

Financial or Economic Theory

Estimation

Econometric Model Data

Is the Model Adequate?Noo

Yes

Let`s get some Data

• Let`s go to the website of

Council for Economic Planning and Development.

• http://www.cepd.gov.tw/encontent/

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Let`s get some Data

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This data can be obtained fromCouncil for Economic Planning and Development http://www.cepd.gov.tw/encontent/

Taiwan Business Indicators / Business Indicators Database /Component Series /

Data Frequency Monthly

Data Period From Year: 1980 Month: 1 To Year: 2012 Month: 12

Advanced change from previous month year on year change

Leading Indicators Stock prices index

Submit

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Panel datao Cross-sectionalo Time series

Data Structure

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Raw Data

Raw data can help us in graphical form to:

• Determine the distribution (Histograms)

• Compare two or more series (processies) (Line graph)

• Observe revelation of a serie (process) (Scatterplot)

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• Trend

• Cycle

• Seasonal

• Irregularo Episodico Residual

Components of Financial or Economic Time Series

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• Growth Rates

• Changing Indices and Base• Changing Frequency (stock vs. flow var.)

• Nominal vs. Real (appropriate deflator)• Logs (linearizing trend or model, interpretation)

• Diffrencing (Stationarity)

Basic Financial or Economic Data Handling

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Growth Rates

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Discretely Compounding Growth Rates

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Discretely Compounding Growth Rates

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Continuously Compounding Growth Rates

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Continuously Compounding Growth Rates

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Basic Financial or Economic Data Handling

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• Changing Frequency (stock vs. flow var.)

Stock data: Data value at a particular time (Stock Price)

Beginning of the period

Middle of the period

End of the period

Average of the period

Flow data: Data value representing a period of timeperiodic values can be added (monthly incomes added up to

annual income)

Basic Financial or Economic Data Handling

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END

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Discretely Compounding Growth Rates

Let`s get some Data

• Let`s go to the website of

Council for Economic Planning and Development.

• http://www.cepd.gov.tw/encontent/

Statistics / Taiwan Statistical Data Book / Taiwan Statistical Data Book 2011 /

Taiwan Statistical Data Book 2011 (excel) Download

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Let`s get some Data Cont.

• In the zip file

2011.000 is the Table of Contents

• Open the zip file and take out

2011.03Worksheet 3-1 contains annual GDP of

Taiwan covering periods from 1985 to 2010.

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• Data Entry

• Graphics

• Summary Statistics

EViews

Getting Data in EViews

• File/Open/ Foreign Data as Workfile....– Follow steps

• Change Year’s data type to «Date»

• Automatically 2 new variables «c» and «residuals» are created.

• Highlight the original variables (except ‘Year’

• Wright click and choose «Open as Group»31

Summary Statistics & Graph

• View / Descriptive Stats / individual Samples

• View / Graph /

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