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s
are parameters to estimate.
1. rdinary 6east S2uares 76S8 Estimation.
This is the most commonly and widely used estimation method when classical
assumptions of regression are all met. The classical assumptions are1
-)
( ) ! " u E
t t
=
6) t
"
and t
u
are uncorrelated,
( ) ! u " E
t t
=
?) Error terms are homosedastic, ( ) ( )
2
t
2
t t t
% " u E " u Var = =
5) There is no autocorrelation,
( ) ( ) ! " u u E " u & u 'ov
s t s t
= =
t t2 2 t ! t
u " # " # # $ + + + =
, ( )
2
t
% !& ( ) u
3uic+.Estimate EAuation ((ou have the e0uivalent menu 8)@ects.Ne* 8)@ects.
EAuation, and this is the same as throughout all regression procedure). =ive
appropriate regression name in the Name of 8)@ect window. /lic .8 to get
regression window and type D 0 B# B2 in the EAuation 6pecification window.
/hoose Least 6Auares in the Estimation 6ettings window. "pecify appropriate
sample period.
L6 D 0 B# B2
>
2. Generali9ed 6east S2uares 7G6S8 Estimation.
When the classical assumptions of regression are violated, we still can have
consistent estimates by .:", but we no longer have efficient estimators. To obtain
efficient estimators, we need to use various modifications of .:", collectively called
=:".
t t2 2 t ! t
u " # " # # $ + + + =
, ( ) ( )
2
t
" % !& ( ) u
2!#! /eig?te% Least 6Auares for >eteros+e%asticity!
*f you have a prior nowledge of the pattern of heterosedasticity, e.g.,
( )
2
2 2
" % " % = , then you can transform the heterosedasticity into
homosedasticity by dividing all variables by
+
t
+
t t
5 . 6 . 7 $
+ =
, where
( ) + .& 7&
are parameters to be estimated.
3uic+.Estimate EAuation , and in the EAuation 6pecification window, type
( ) ( ) 8'9:;; 9 < 9='9:; 5< 4 '92; 9='9:;; 6< 4 '92; 4 '9; $ + = , where 0Ds are
parameters to be estimated nonlinearly. /hoose Least 6Auares in the Estimation
6ettings window.
.. !on;Stationary Time Series 3nalysis
Time series data { }
>
t t
y
=
is nonstationary if its autocorrelation coefficient (
+
, see
section to above) is one, i.e., this series e%plodes as time progresses and has no finite
variance. *f this is the case, we call that this series has a unit root (
+ =
), or in a
more technical notation,
I9; ) y
t
, which means that the series
t
y
has to be
differenced once to be stationary.
&!#! Unit ,oot 2est
=eneral unit root test proceeds as follows1 /onsider the following regression
model1 t t t
u y + y + =
. Testing the unit root hypothesis is e0uivalent to test to
see if
+ =
. This basic e0uation is modified to the following three e0uations.
t t t
t t t
t t t
u t # y . 0 ?y
u y . 0 ?y
u y . ?y
+ + + =
+ + =
+ =
This is the basic ,icey$'uller unit root test e0uation, and the testable hypothesis
is ! . = (i.e.,
+ =
, t
y
has a unit root). There are three different tables
depending on your testable e0uation (wF or wFo intercept andFor trend variable).
More general version of the original ,8 test is the )ugmented ,8 test (),') as
following.
t
@
-
- = t - t t
t
@
-
- = t - t t
t
@
-
- = t - t t
u ?y A t # y . 0 ?y
u ?y A y . 0 ?y
u ?y A y . ?y
+ + + + =
+ + + =
+ + =
=
+
=
+
=
+
*n the ),' test, we assume the error terms ( t
u
) are independent and have
constant variances. )lso, the lag length : in the regression e0uation is rather
-?
arbitrary. To overcome this problem, #hillips$#erron generali7ed ),' test as
following1
( )
t t t
t t
4
t
u 2 > = t # y . 0 y
u y . 0 y
+ + + =
+ + =
O O
O
Even though these e0uations loo simpler than ),' test, this test allows far more
general data generating process allowable by the ),' test. <oth tests use the
same critical values.
"elect the series you want to test unit root, and double clic (or =ie*.6?o*) the
series to get the series window. /lic =ie*.Unit ,oot 2est and choose
appropriate options (),' or #hillips$#erron, and appropriate e0uation for unit
root test).
&!2! =ector 1utoregression 5=1,7
V); is a system of stationary time series variables. Each e0uation has the same
right$hand side variables consisting of e%ogenous variables and the lagged values
of all endogenous variables in the system. This system is often used to determine
the causality (=ranger$causality) between variables. This system is also useful to
investigate the e%ternal shoc effects on the endogenous variables using impulse
response function.
2t 2: t 22 t 2 2! t
t : t 2 t ! t
u t # B # $ # 0 B
u t # B # $ # 0 $
+ + + + =
+ + + + =
8)@ects.Ne* 8)@ect.=1, and select appropriate entries. 'or V); specification,
choose Unrestricte% =1, and specify Endogenous and E%ogenous variables.
)lso specify lag length and sample period.
&!'! 0ointegration
When time series variables are non$stationary, it is interesting to see if there is a
certain common trend between those non$stationary series. *f two non$stationary
series
I9; ) $ I9;& ) "
t t
has a linear relationship such that
t t t
$ # " 0 m B + + =
and
I9!; ) B
t
, ( t
B
is stationary), then we call the two
series t
"
and t
$
are cointegrated. Two broad approaches to test for the
cointegration are Engel and =ranger (-2>G) and Mohansen (-2>>). <roadly
speaing, cointegration test is e0uivalent to e%amine if the residuals of regression
between tow non$stationary series are stationary. 'or Engel$=ranger test, regress
t
$
on t
"
(or vice versa), and use the residual to see if it is stationary (unit root
test described above). *f it is stationary, two series t
"
and t
$
are cointegrated.
Mohansen uses more complicated V); structure to test the cointegration. EViews
use Mohansen test for cointegration.
-5
*n a multiple non$stationary time series, it is possible that there is more than one
linear relationship to form a cointegration. This is called the cointegration ran.
'or cointegration test, select the series (group of variables) to test cointegration to
obtain group window. /hoose =ie*.0ointegration 2est and specify appropriate
settings for testing. The setting is whether you want to specify intercept andFor
linear deterministic time trend in the cointegration e0uation.
&!4! Error 0orrection 9o%e(
*f two or more non$stationary time series are cointegrated, then there e%ists an
Error /orrection Model (E/M). /ointegration is a necessary condition for E/M.
E/M describes the long run e0uilibrium relationship between non$stationary
series. Even though individual series are non$stationary, when they are
cointegrated, there is a long run e0uilibrium relationship, and E/M e%plains this
relationship.
2t t 2 t 22 t 2 2 t
t t t 2 t t
u B ?$ . ?" . m ?$
u B ?$ . ?" . m ?"
+ + + + =
+ + + + =
E/M is similar to V);, but the original series are non$stationary and they are
cointegrated. To estimate E/M, follow the same path as V); estimation.
8)@ects.Ne* 8)@ect.=1, and select appropriate entries. 'or V); specification,
choose =ector Error 0orrection, and specify appropriate cointegration e0uation
(i.e., wF or wFo intercept andFor deterministic time trends).
0. System of E2uations
When we have more than one e0uations to estimate together, we will use additional
information from other e0uations to improve the efficiency of parameter estimates.
"!#! 6eeming(y Unre(ate% ,egression
t t2 2 t ! t
u " # " # # $ + + + =
t t2 22 t 2 2! t
u2 "2 # "2 # # $2 + + + =
( ) $2 $&
are dependent variables and
( ) "2 "&
s are independent variables.
Error terms
( ) u2 u&
are contemporaneously correlated, i.e.,
! u2; cov9u&
.
.:" estimators are still consistent, but they are not efficient.
8)@ects.Ne* 8)@ects.6ystem and you can give the name of the system in the
Name for 8)@ect bo% for later use. /lic 8F and then you will have a blan
6ystem window. Type your e0uations for such that (-E/(-)H/(6)B C-H/(?)BC6
for first e0uation and (6E/(5)H/(@)B C?H/(3)BC5, etc. /lic Estimate and
choose 6eeming(y Unre(ate% ,egression for "+; model. "ince "+; estimation
-@
involves numerical iteration, you can choose appropriate number of iterations and
convergence criteria in the 8ptions button.
"!2! 6imu(taneous EAuation 6ystem
t t 2 t ! t
u $2 . " # # $ + + + =
t t 2 t 2 2! t
u2 $ . "2 # # $2 + + + =
This e0uation system is different from "+; model in a sense that the dependent
variables appear in the right hand side of each e0uation. <ecause of this
endogeneity problem, simple .:" of each e0uation will yield inconsistent
estimators. To estimate this simultaneous e0uation system, each e0uation should
fist satisfy identification condition of order condition and ran condition.
"!2!#! 2*o 6tage Least 6Auares 526L67!
This is one of the most often used estimation methods for simultaneous
e0uation. The first stage of the T":" estimation involves the estimation of all
endogenous variables on all e%ogenous variables in the system and some other
instrumental variables. The second stage is the least s0uares estimation of the
structural e0uations using the estimated values of the endogenous variables
from the first stage. The structural parameters are estimated in each e0uation
separately.
"!2!2! 2?ree 6tage Least 6Auares 5'6L67
?":" is more efficient estimation procedure than T":" in the sense that ?":"
estimates entire structural parameters all at once. The first two stages of ?":"
is e0uivalent to the T":", but ?":" uses T":" estimates to estimate co$
variance structure of entire system. +sing the estimated co$variances of the
system, the final stage (the third stage) is the =:" estimation method of the
entire system. This method is more efficient than T":".
To use either one of above estimation method, clic 8)@ects.Ne* 8)@ect.6ystem
as above for "+; estimation. *n the 6ystem window, type in only the behavioral
e0uations. <ehavioral e0uations are the ones with structural parameters to
estimate. *gnore any other identities in the system. Type your e0uations for such
that (-E/(-)H/(6)B (6H/(?)BC- for first e0uation and (6E/(5)H/(@)B
(-H/(3)BC6, etc. "ince this is T":" or ?":" estimation, you need to specify
instrumental variables for the first stage estimation. )fter the structural e0uations,
you need to specify which variables to use as instrumental variables. 'or T":"
and ?":", you need all e%ogenous variables in the system for the instrumental
variables. Type IN62 B# B2. /onstant is automatically included as an
instrumental variable. /lic Estimate in the 6ystem menu bar. (ou will have a
choice of different estimation methods. /hoose either 2*o 6tage Least 6Auares
or 2?ree 6tage Least 6Auares.
-3
"!'! 4enera(iGe% 9et?o% of 9oment 54997 Estimation
=MM estimation is relatively new estimation techni0ue in econometrics and it is
intuitively appealing because of its wea assumptions of estimation process. This
is one e%ample of growing literature of semi$parametric estimation methods.
=MM uses the sample analog of population orthogonality condition to estimate
parameters. 'or e%ample, if the e%ogenous variable ( t
"
) is independent of
random disturbance term ( t
u
), then we have the population orthogonality
condition
( ) ! u " E
t t
=
. Then, we have
( ) ! " u E
t t
=
and
( ) ( ) ! " g u E
t t
= for
any function of
g
. 'rom this population orthogonality condition, we can form
sample analogs of population orthogonality conditions such that
! u
>
>
t
t
=
=
and
! " u
>
>
t
t t
=
=
, where t ! t t
" # # $ u =
. These are called the sample
moments, and we estimate the population parameters by minimi7ing the following
criteria function
( ) # S
.
( )
> >
3
>
m C m # S = , where
=
=
>
t
t t
>
t
t
>
" u
>
u
>
m , and
>
C is a weighting matri%
defined as
( ) ( ) [ ]
3
> >
# m # m
.
EViews provides =MM estimation method in the system of e0uation estimation.
'ollow the same step as above for T":" (?":"). Type appropriate estimation
e0uations and instrumental variables list, then choose 499. ,epending on the
data structure, choose appropriate method either for heterosedasticity or
autocorrelation problem.
-G