SEM205 Econometrics Lecture 3
SEM205 Econometrics Lecture 3
Yi B1 B2 ln X i ui
1 1
Lin-log Y B1 B2 ln X B2 ( ) B2 ( )
X Y
1 1 1
Reciprocal Y B1 B2 ( ) B2 ( ) B2 ( )
X X2 XY
STANDARDIZED VARIABLES
We can avoid the problem of having variables measured in
different units by expressing them in standardized form:
_
* Yi Y * Xi X
Yi ; Xi
SY SX
_
where SY and SX are the sample standard deviationsY
_
and X and are the sample means of Y and X, respectively
The mean value of a standardized variable is always zero
and its standard deviation value is always 1.
MEASURES OF GOODNESS OF FIT
R2: Measures the proportion of the variation in the regressand explained by the
regressors.
Adjusted R : Denoted as
2 R, 2it takes degrees of freedom into account:
_
n 1
R 2 1 (1 R 2 )
n k
Akaike’s Information Criterion (AIC): Adds harsher penalty for adding more
variables to the model, defined as:
2k RSS
ln AIC ln( )
n n
where ERi = expected rate of return on security i, ERm = expected rate of return on a
market portfolio, rf = risk-free rate of return, β = the Beta coefficient, a measure of
systematic risk that cannot be eliminated through portfolio diversification.
Beta coefficient greater than 1: Suggests a volatile security
Beta coefficient of less than 1: Suggests a defensive security
Sums of squares and cross-product terms are raw terms here:
n
XY i i 2 e 2
i
b2 i n1 var(b2) = n
2
X i2 X
i 1
i
2
n 1
i 1