ECS3706 EXAM PACK.

ECS3706 EXAM PACK. ECS3706 - Econometrics. Regression analysis is used to make quantitative estimates of economic relationship that previously have been completely theoretical in nature. is the co-efficient of determination which measures the goodness of fit of the whole equation. The problem with is that whenever an independent variable is added it will increase even when it is an irrelevant variable. measures the percentage of the variation of Y around its mean that is explained by the regression equation, but adjusted for the degrees of freedom. Usually a higher fit does not guarantee a good estimation because the fit can be only measure used. Question 2 (a)(i) Theory which underlies the model (ii) The statistical significance of the t-test (iii) The which determines the goodness of fit of the whole equation (iv) Bias 4 Reed Tutorials (pty) Ltd (b) Sequential specification involves the initial specification of an equation and estimates it, then adding other independent variables until a plausible equation is found while data mining involves estimating a variety of alternative specifications before that best equation has been chosen. (c) (i) Specification bias occurs when an independent variable is omitted which is relevant in the equation. (ii) Unbiased estimates could mean the equation is correctly specified or an independent variable is omitted those results in a high variance while biased estimates may decrease the variance. The importance of each of the two would depend on the importance of either type 1 or type 2 errors. (iii) To avoid specification the four important specification criteria must be followed (refer to question 2 (a).) Question 3 (a) The stochastic error term is added to the regression equation because it helps capture the minor variations in Y which are not captured by the Xs. It is virtually 5 Reed Tutorials (pty) Ltd impossible to avoid some sort of measurement error hence the stochastic error captures that. The underlying theory may differ from the chosen functional form hence the need for an error term. (b) OLS means ordinary least squares, it is a technique that calculates the Bs so as to minimize the sum of p squared residuals which is calculated as . (c) (i) Review the literature and develop the theoretical model (ii) Specify the model (iii) Hypothesize the expected signs of the coefficients (iv) Collect the data, inspect and clean the data (v) Estimate and evaluate the equation (vi) Document the results Question 4 6 Reed Tutorials (pty) Ltd (a) They are 2800 households in the sample which is given by ∑ (b) Given Y=B0 +B1X1 + Ɛ Solving for B1= = = 0.7550 Solving for B0= Y- B1 X1 = 22.6-0.755(11.2) = 14.144 Y = 14.14+0.755X