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CARAGOS
APPLIED ECONOMETRICS
MA in Economics
Summer SY 2014-2015
FINAL EXAM
PART I: THEORETICAL
MULTICOLLINEARITY
exists when at least some of the predictor variables are correlated among themselves;
A linear relation between the predictors. Predictors are usually related to some
extent, it is a matter of degree.
Examples include a person's gender, race, grade point average, math SAT score, IQ,
and starting salary. For each of these predictor examples, the researcher just
observes the values as they occur for the people in the random sample.
Some researchers observed the following data on 20 individuals with high blood
pressure:
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allow us to investigate the various marginal relationships between the response BP and
the predictors. Blood pressure appears to be related fairly strongly to Weight and BSA,
and hardly related at all to Stress level.
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The matrix plots also allow us to investigate whether or not relationships exist among
the predictors. For example, Weight and BSA appear to be strongly related, while
Stress and BSA appear to be hardly related at all.
OMITTED VARIABLE BIAS
is the bias that appears in the estimates of parameters in a regression analysis, when
the assumed specification is incorrect in that it omits an independent variable that is
correlated with both the dependent variable and one or more included independent
variables.
UNBIASEDNESS
is an estimator or decision rule with zero bias. All else equal, an unbiased estimator
is preferable to a biased estimator, but in practice all else is not equal, and biased
estimators are frequently used, generally with small bias. When a biased estimator is
used, the bias is also estimated. A biased estimator may be used for various reasons:
because an unbiased estimator does not exist without further assumptions about a
population or is difficult to compute (as in unbiased estimation of standard
deviation); because an estimator is median-unbiased but not mean-unbiased (or the
reverse); because a biased estimator reduces some loss function (particularly mean
squared error) compared with unbiased estimators (notably in shrinkage
estimators); or because in some cases being unbiased is too strong a condition, and
the only unbiased estimators are not useful.
P-VALUE
is the level of marginal significance within a statistical hypothesis test, representing
the probability of the occurrence of a given event. The p-value is used as an
alternative to rejection points to provide the smallest level of significance at which
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the null hypothesis would be rejected. The smaller the p-value, the stronger the
evidence is in favor of the alternative hypothesis.
For example, if two studies of returns from two particular assets were done using two
different significance levels, a reader could not compare the probability of returns for
the two assets easily. For ease of comparison, researchers will often feature the pvalue in the hypothesis test and allow the reader to interpret the statistical
significance themselves. This is called a p-value approach to hypothesis testing.
We obtain the random sample from the population and confirm that each of
X1 and X2 has variation within the sample.
i)What are the parameters in this model? (5pts); ii) State when the
explanatory variable X1 is called to be endogenous. (5pts); iii) Suppose that ii)
X1 and X2 are both exogenous and linearly independent but two variables are
highly correlated. What problem does this cause for the estimation of 1.
(10pts)
iii)
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ii)
i)
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$0.135
increase in
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ii)
Given the following model:
Log(wage)=0+ 1 (educ)+ 2 (female1)+3(experience)+u
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i)
iii)
What is the estimated birth weight when cigs = 0? How does it change
when cigs = 20 pieces? Discuss the difference.
iv) Is it enough to run such regression models to explain the causal relationship
between the birth weight, and smoking behavior of the mother and
ii) If cigarette consumed is 0, the birth weight is 4.734
family income? Please justify your answer.
If cigarettes consumed are 20 pcs, it will result to a decrease in birthweight by
0.08 or 8%
10 | P a g e
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