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Econometrics I
Professor William Greene
Stern School of Business
Department of Economics
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Econometrics I
Part 2 Projection and
Regression
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Statistical Relationship
Objective: Characterize the relationship
between a variable of interest and a set of
'related' variables
Context: An inverse demand equation,
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Conditional Moments
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50 Observations on P and Q
Showing Variation of P Around E[P]
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---------------------------------------------------------------------Ordinary
least squares regression ............
LHS=Y
Mean
=
1.21632
Standard deviation
=
.37592
Number of observs.
=
100
Model size
Parameters
=
2
Degrees of freedom
=
98
Residuals
Sum of squares
=
9.95949
Standard error of e =
.31879
Fit
R-squared
=
.28812
Adjusted R-squared
=
.28086
--------+------------------------------------------------------------Variable| Coefficient
Standard Error t-ratio P[|T|>t]
Mean of X
--------+------------------------------------------------------------Constant|
.83368***
.06861
12.150
.0000
X|
.24591***
.03905
6.298
.0000
1.55603
--------+-------------------------------------------------------------
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1.75
E XPE CT DY
1.40
1.05
.70
.35
.00
0
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Representations of Y
Summary
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Linearity
Simple linear model, E[y|x]=x
Quadratic model: E[y|x]= + 1x + 2x2
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Linearity
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E[yN|x] = xN
All n observations at once: E[y|X] = X = E.
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Uniqueness of E[y|X]
Now, suppose there is a that produces the
same expected value,
E[y|X] = X = E.
Let = - . Then,
X = X - X = E - E = 0.
Is this possible? X is an NK matrix (N rows, K
columns). What does X = 0 mean? We
assume this is not possible. This is the full
rank assumption it is an identifiability
assumption. Ultimately, it will imply that we can
estimate . (We have yet to develop this.)
This requires N K .
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Linear Dependence
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3/49
The Persistence
of Econometrics
Greene, 2011
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Why do larger
paintings command
higher prices?
The Persistence of
Memory. Salvador
Dali, 1931
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Notation
Define column vectors of n observations on y and the K
variables.
y1
y
2
x11 x12 L x1 K 1 1
x
x
L
x
21
22
2 K
2
2
L M M M M
M M
yN xN1 xN2 K xNK
K N
= X +
The assumption means that the rank of the matrix X is K.
No linear dependencies => FULL COLUMN RANK of the matrix X.
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E[|all data in X] = 0
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Normal Distribution of
An assumption of limited
usefulness
Temporary.
Regression?
If E[y|X] = X then E[y|x] is also the projection.
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