Econometrics For Finance Course Outline

UNITY UNIVERSITY
DEPARTMENT OF ACCOUNTING AND FINANCE

COURSE TITLE: ECONOMETRICS FOR FINANCE

COURSE CODE: ACFN 406 ACADEMIC YEAR: 2017/2025

INSTRUCTORS: AMSALU B. (MSC)
CREDIT HOURS: THREE (3)
Email: [email protected]
PROGRAM: DEGREE

Course Description:

The literal meaning of the word econometrics is ‘measurement in economics’.

The word suggests correctly that the origins of econometrics are rooted in
economics. However, the main techniques employed for studying economic
problems are of equal importance in financial applications. As the term is
used in this course, financial econometrics will be defined as the application of
statistical techniques to problems in finance.
Financial econometrics can be useful for testing theories in finance,
determining asset prices or returns, testing hypotheses concerning the
relationships between variables, examining the effect on financial markets of
changes in economic conditions, forecasting future values of financial variables
and for financial decision-making. Techniques such as regression models and
null hypothesis testing are commonly used in financial econometrics.
The course aims at introducing the theory (and practice) of cross-sectional
econometrics. It first makes an introduction to the basic concepts in
econometrics like economic and econometric modeling as well as types of data;
then proceeds to the simple classical linear regression model and introduces
estimation techniques such as the method of moments, ordinary least squares
and maximum likelihood estimation, inference and analyses of residuals.

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Econometrics For Finance Course Outline

This is then built into the multiple linear regression frameworks. After making
tests of linear restrictions emanating from economic theory, the course will
finally try to highlight the problems of multicollinearity, heteroscedasticity and
autocorrelation (violations of the basic assumptions of classical linear
regression models).
Course Outcomes:
The main outcomes of this course are to enable students have a good
background knowledge on cross-sectional econometric models. More
specifically, after the completion of the course, students are expected to:
o Distinguish between economic and econometric models;
o Do simple and multiple regression with economic data (both manually
and using statistical packages);
o Interpret regression results (like coefficients and R2) and test hypotheses
(both manually and using statistical packages); and
o Detect (in) existence of problems of multicollinearity, heteroscedasticity
and autocorrelation as well as suggest how to rectify such problems
(both manually and using statistical packages).
Course Contents
1. Chapter One: Introduction
1.1. Definition and scope of econometrics
1.2. Econometrics vs Mathematical economics
1.3. Econometrics vs Statistics
1.4. Economic model vs Econometrics model
1.5. Methodology of Econometrics
1.6. Desirable properties of an econometric model
1.7. Goals of econometrics
1.8. Types of data
1.8.1. Time series data
1.8.2. Cross–sectional data
1.8.3. Pooled data
1.8.4. Panel Data

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Econometrics For Finance Course Outline

2. Chapter Two: The Classical Regression Analysis: Simple Linear

Regression
2.1. Introduction
2.2. Stochastic and non-stochastic relationships
2.3. The Simple Regression model
2.4. The basic Assumptions the Classical Regression Model
2.5. Methods of estimation
2.5.1. Method of moments (MM)
2.5.2. Ordinary least square method (OLS)
2.5.3. Maximum likelihood method (MLM)
2.6. Statistical Properties of OLS Estimators
2.7. Statistical test of Significance of the OLS Estimators(First
Order tests)
2.8. Reporting the Results of Regression Analysis
3. Chapter Three: The Classical Regression Analysis: The Multiple Linear
Regression Model
3.1. Introduction
3.2. Assumptions of the Multiple Regression Model
3.3. A Model With Two Explanatory Variables
3.4. Method of Ordinary Least Squares revised
3.5. Partial Correlation Coefficients & their Interpretation
3.6. Coefficient of Multiple Determination
3.7. Properties of Least Squares and Gauss-Markov Theorem
3.8. Hypothesis Testing in Multiple Regression Model
4. Chapter Four: Violations Of Econometrics Assumptions
4.1. Multicollinearity test
4.1.1. Nature, causes, Effects, Tests and Remedial measures
4.2. Heteroscedasticity tests and weighted least squares
4.2.1. Nature, causes, Effects, Tests and Remedial measures
4.3. Autocorrelation-tests
4.3.1. Nature, causes, Effects, Tests and Remedial measures

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Econometrics For Finance Course Outline

4.4. Specification Errors: Omission of Variables

4.5. Tests of Parameters Stability
5. Regression Analysis with Qualitative Data: Binary (Dummy Variables)
5.1. Introduction
5.2. Describing Qualitative Information
5.3. Dummy as Independent Variables
5.4. Dummy as Dependent Variable
5.4.1. The Linear Probability Model (LPM)
5.4.2. The Logit and Probit Models
5.4.3. Interpreting the Probit and Logit Model Estimates
6. Chapter 6: Basic Regression Analysis with Time Series and Panel Data
6.1. The nature of Time Series Data
6.2. Stationary and non-stationary stochastic Processes
6.3. Trend Stationary and Difference Stationary Stochastic Processes
6.4. Integrated Stochastic Process
6.5. Tests of Stationarity: The Unit Root Test
Course Policy
o Late coming is not allowed and no student is allowed to enter after class
started.
o Plagiarism is strictly forbidden; it entails serious penalty.
o Assignments are required to be submitted before or on the deadline.
o While cheating during examination sessions results in a grade of “F“,
cheating in quizzes and tests is subjected to a zero mark in the particular
quiz/test the student cheated. All cheating cases will be reported to the
department for further considerations.
o Students should switch off their cell phones while they are in class and
during all kinds of examination sessions.
o Students must at least attend 80% of the class. A student who failed to
attend at least 80% of the classes will not be legible to sit for the final
examination.

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Econometrics For Finance Course Outline

o Missing a quiz/test without convincing evidences will fetch the students a

grade of zero marks in that specific quiz/test.
REFERENCES:
o Gujarati, D. N. and D. C. Proter (2009). Basic Econometrics, 5th edition,
McGraw
o Maddala, G. S. (1992). Introduction to Econometrics, 2nd edition,
Macmillan.
o Wooldridge, J. (2013). Introductory Econometrics: A Modern Approach, 5nd
ed.
o Enders, W. (2014). Applied Econometric Time Series, John Wiley & Sons:,
4th ed., Singapore.
o Koutsoyiannis, A. (2001). Theory of Econometrics, Palgrave: New York.
o Johnston, J. and J.Dinardo (1997) Econometric Methods, 4th edition.
o Kmenta, J. Elements of Econometrics, 2nd edition.
o Intrilligator M.D, R.G. Bodkin, and D. Hsiao (1996). Econometric Models,
Techniques and Applications.
o Verbeek (2004), A Guide to Modern Econometrics. New York: John Wiley &
Sons, Ltd.

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