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Econometrics

(i) The document presents three econometrics exercises analyzing relationships between economic variables using regression models. Exercise 1 examines how median housing price relates to pollution and home size. Exercise 2 considers estimating the sum of coefficients in a multiple regression model. Exercise 3 analyzes CEO salaries in relation to firm sales, return on equity, and return on stock. (ii) Exercise 3 estimates a regression model of log CEO salary on log firm sales, return on equity, and return on stock using sample data. It asks the reader to interpret coefficient estimates and test hypotheses about the effect of return on stock on salary. (iii) In general, the exercises analyze econometric techniques like hypothesis testing, interpretation of regression coefficients,

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Jessica Soh
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1K views

Econometrics

(i) The document presents three econometrics exercises analyzing relationships between economic variables using regression models. Exercise 1 examines how median housing price relates to pollution and home size. Exercise 2 considers estimating the sum of coefficients in a multiple regression model. Exercise 3 analyzes CEO salaries in relation to firm sales, return on equity, and return on stock. (ii) Exercise 3 estimates a regression model of log CEO salary on log firm sales, return on equity, and return on stock using sample data. It asks the reader to interpret coefficient estimates and test hypotheses about the effect of return on stock on salary. (iii) In general, the exercises analyze econometric techniques like hypothesis testing, interpretation of regression coefficients,

Uploaded by

Jessica Soh
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PDF, TXT or read online on Scribd
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Econometrics Exercise 3

Exercise 1 (Wooldridge 3.11) The following equation describes the median housing price in a community in terms of amount of pollution (nox for nitrous oxide) and the average number of rooms in houses in the community (rooms):
log (i) (ii) log What are the probable signs of 1 and 2 ? What is the interpretation of 1 . Explain. Why might nox [or more precisely, log( nox ) ] and rooms be negatively correlated? If this is the case, does the simple regression of log( price) on log( nox ) produce an upward or a downward biased estimator of 1 ? Using the data in HPRICE2.RAW, the following equations were estimated: log log 9.23 11.71 1.043 log , 0.718 log 0.306 506, , 0.264. 506, 0.514.

(iii)

Is the relationship between the simple and multiple regression estimates of the elasticity of price with respect to nox what you would have predicted, given your answer in part (ii)? Does this mean that -0.718 is definitely closer to the true elasticity than -1.043? Consider the multiple regression model containing three independent variables, under Assumptions MLR.1 through MLR.4: y = 0 + 1 x1 + 2 x2 + 3 x3 + u. You are interested in estimating the sum of the parameters on x1 and x2 ; call this 1 = 1 + 2 . (i) Show that = + is an unbiased estimator of .
1 1 2
1

Exercise 2 (Based on Wooldridge 3.5)

(ii) (iii)

Find Var (1 ) and se(1 ) in terms of Var ( 1 ) , Var ( 2 ) , and Corr ( 1 , 2 ) . Write down the test statistic for testing : 1 in terms of and and the
1 2

estimates of standard deviations and/or covariances of 1 and 2 .


Consider an equation to explain salaries of CEOs in terms of annual firm sales, return on equity (roe, in percentage form), and return on the firms stock (ros, in percentage form): log( salary ) = 0 + 1 log( sales ) + 2 roe + 3 ros + u. (i) In terms of the model parameters, state the null hypothesis that, after controlling for sales and roe, ros has no effect on CEO salary. State the alternative that better stock market performance increases a CEOs salary. Using the data in CEOSAL1.RAW, the following equation was obtained by OLS 4.32 0.280 log (0.32) (0.35) 0.283. 0.0174 (0.0041) 0.00024 (0.00054)

Exercise 3 (Wooldridge 4.1)

(ii)

209,

By what percentage is salary predicted to increase if ros increases by 50 points? Does ros have a practically large effect on salary? (iii) Test the null hypothesis that ros has no effect on salary against the alternative that ros has a positive effect. Carry out the test at the 10% significance level.

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