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Econometric Modelling: Module - 4

This document outlines the modules of an econometrics course taught by Dr. Sujata Kar. It is divided into 8 parts covering topics such as introduction to econometrics, classical linear regression models, multiple regression analysis, statistical inference, univariate time series modeling, models with binary variables, and multivariate models. The document provides examples and definitions of key concepts in econometrics like sample covariance, population covariance, sample variance, correlation coefficient, and the differences between covariance and correlation. It also lists two references used in the course.

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Bharathithasan Saminathan
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41 views14 pages

Econometric Modelling: Module - 4

This document outlines the modules of an econometrics course taught by Dr. Sujata Kar. It is divided into 8 parts covering topics such as introduction to econometrics, classical linear regression models, multiple regression analysis, statistical inference, univariate time series modeling, models with binary variables, and multivariate models. The document provides examples and definitions of key concepts in econometrics like sample covariance, population covariance, sample variance, correlation coefficient, and the differences between covariance and correlation. It also lists two references used in the course.

Uploaded by

Bharathithasan Saminathan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Econometric Modelling

MODULE - 4
Dr. Sujata Kar
Assistant Professor
DEPARTMENT OF MANAGEMENT STUDIES IIT ROORKEE

1
Part 1: Introduction to Econometrics
Part 5: Univariate Time Series Modeling
Module 1: An Overview
Module 25, 26, 27: Problem of Serial Correlation
Module 2: Formulation of Econometric Modelling
Module 28: AR, MA & ARMA Processes
Module 3 & Module 4: Review of Basic Concepts
Module 29: Modelling Seasonal Variations
Module 5: Types of Data

Part 2: Overview of Classical Linear Regression Model Part 6: Models with Binary Dependent and Independent
Module 6 & 7: Simple Regression Variables
Module 8: Assumption of Classical Linear Regression Module 30 & 31: Spline Function & Categorical Variables
Module 9: Properties of OLS Estimators Module 32 & 33: Probit, Logit and Multinomial Logit Models
Module 10: Hypothesis Testing

Part 3: Multiple Regression Analysis & Diagnostic Tests


Module 11, 12 & 13: Multiple Regression Part 7: Multivariate Models
Module 14: Problems of Multicollinearity Module 33 & 34: Simultaneous Equations System
Module 15 & 16: Omitted Variables & Parameter Stability Module 35 & 36: Introduction to VARs
Module 17 & 18: Problem of Heteroscedasticity

Part 4: Statistical Inference and Hypothesis Testing


Module 19: t-test Part 8: Modelling Long Run Relationships
Module 20 & 21: Wald test Module 37, 38 & 39: Stationarity & Unit Root Testing
Module 22 & 23: F-test Module 40: Basics of Cointegration
Module 24: Chow test
Review of Basic Concepts
MODULE - 4

3
Sample Covariance
• Sample covariance is a measure of association between two
variables.
• In general, given n observations on two variables X and Y, the
sample covariance between X and Y is given by

• The sample covariance can be positive or negative depending on a


positive or negative association between X and Y.

4
Example: Consumption Function

The covariance
between PFCE
and GDP is
1131.54.
This positive
association can
be explained
using the
diagram.

5
Basic Covariance Rule

Rule 1 If Y = V + W, Cov (X, Y) = Cov (X, V)+ Cov (X, W)

Rule 2 If Y = bZ, where b is a constant and Z is a variable,


Cov (X, Y) = b Cov (X, Z)

Rule 3 If Y = b, where b is a constant, Cov (X, Y) = 0.

6
Population Covariance
• If X and Y are random variables, the expected value of the product
of their deviations from their means is defined to be the
population covariance,

• If X and Y are independent, their population covariance is 0,


because

and

7
Sample Variance
• For a sample of n observations, X1, ..., Xn, the sample variance
will be defined as the average squared deviation in the sample

• This is an unbiased estimator of population variance; proof


discussed in later modules.
• The variance of a variable X can be thought of as the covariance
of X with itself.

8
Variance Rules

Variance Rule 1 If Y = V+W, Var(Y) = Var(V)+ Var(W)+2Cov(V,W)

Variance Rule 2 If Y = bZ, where b is a constant, Var(Y) = b2Var(Z)

Variance Rule 3 If Y = b, where b is a constant, Var(Y) = 0

Variance Rule 4 If Y = V+b, where b is a constant, Var(Y) = Var(V)

9
Correlation Coefficient

Population correlation between X and Y,


• If X and Y are independent, ρXY will be zero since population
covariance, σXY will be zero.
• If there is a positive association between them, σ , and hence
XY
ρXY, will be positive with a maximum value of 1 with an exact
positive linear relationship.
• Similarly, if there is a negative relationship, ρXY will be negative,
with minimum value of –1.

10
Correlation Coefficient
• Sample correlation coefficient is obtained as

• Like ρ, r has maximum value 1, which is attained when there is a


perfect positive association between the sample values of X and Y.
• Similarly, it has minimum value –1, attained when there is a perfect
negative association.
• A value of 0 indicates that there is no association between the
observations on X and Y in the sample.
• Of course the fact that r = 0 does not necessarily imply that ρ = 0 or
vice versa.

11
Covariance versus Correlation

• Correlation coefficient is a better measure than covariance


because it does not depend on the scale of measurement.
• In our consumption function example, the variables PFCE and
GDP at market price, are measured in terms of billions of
Rupees.
• When the observations are divided by 1000, the covariance
value reduces from 1131543497 to 1131.543
• However, the correlation coefficient remains same at 0.99

12
References

• Dougherty, Christopher (2001). Introduction to Econometric.


Oxford, England.
• Brooks, Chris (2008). Introductory Econometrics for Finance.
Cambridge University Press, New York.

13
Thank You

14

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