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Economics 105: Statistics. Please practice your RAP, so you can keep it to 7 minutes. We have lots of them to do. please copy your Powerpoint file to your stats P:\economics\Eco 105 (Statistics) Foley\ userid \ lab space. - PowerPoint PPT Presentation
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Economics 105: Statistics•Please practice your RAP, so you can keep it to 7 minutes. We have lots of them to do. • please copy your Powerpoint file to your stats P:\economics\Eco 105 (Statistics) Foley\userid\ lab space.
Tue Apr 24: Thompson, Shanor, Nielsen, Moniz-Soares, Maher, Dugan, Burke, Adabayeri
Thur Apr 26: Ryger-Wasserman, Lockwood, Gordon, Givens, Christ, Blasey, Bernert, Avinger
Tue May 1: Yearwood, Swany, Ream, Polak, Pettiglio, Murray, Esposito, Bajaj
Thur May 3: Yan, Tompkins, Mwangi, Mooney, Lockhart, Clune, Charles, Bourgeois
• Review #3 due Monday May 7, by 4:30 PM.
Breusch-Pagan test1. Estimate the model by OLS
2. Obtain the squared residuals, 3. Run
4. Do the whole model F-test, rejection indicates heteroskedasticity. Assumes
Breusch, T.S. and A.R. Pagan (1979), “A Simple Test for Heteroskedasticity and
Random Coefficient Variation,” Econometrica 50, pp. 987 - 1000.
Breusch-Pagan test (not needing ) 1. Estimate the model by OLS
2. Obtain the squared residuals, 3. Run
keeping the R2 from this regression, call it4. Test statistic
Rejection indicates heteroskedasticity. .
Breusch-Pagan tests
White test1. Estimate the model by OLS
2. Obtain the squared residuals, 3. Estimate
4. Do the whole model F-test, rejection indicates heteroskedasticity
White, H. (1980), “A Heteroskedasticity-Consistent Covariance Matrix Estimator and a
Direct Test for Heteroskedasticity,” Econometrica 48, pp. 817 - 838.
White test• Adds squares & cross products of all X’s• Advantages
– no assumptions about the nature of the het.• Disadvantages
– Rejection (a statistically significant White test statistic) may be caused by het or it may be due to specification error; it’s a nonconclusive test– Number of covariates rises quickly– so could also run since the predicted values are functions of the X’s (and the estimated parameters) and do F-test
White test
Violations of GM AssumptionsAssumption Violation
“well-specified model” (1) &
(5)
zero conditional mean of errors (2)
Wrong functional formOmit Relevant Variable (Include Irrelevant Var)Errors in VariablesSample selection bias, Simultaneity bias
No serial correlation in errors (4)
constant, nonzero mean due to systematically +/- measurement error in Y
can only assess theoretically
Heteroskedastic errors
Homoskedastic errors (3)
There exists serial correlation in errors
Time Series: Multiple Regression•Assumptions• (1)
– Linear function in the parameters, plus error– Variation in Y is caused by , the error (as well as X)
• (2) – Sources of error
• Idiosyncratic, “white noise” • Measurement error on Y• Omitted relevant explanatory variables
– If (2) holds, we have exogenous explanatory vars– If some Xj is correlated with error term for some reason, then that Xj is an endogenous explanatory var
Time Series:Multiple Regression•Assumptions• (3)
– Homoskedasticity•(4)
– No autocorrelation• (5)
– Errors and the explanatory variables are uncorrelated
• (6)– Errors are i.i.d. normal
Time Series: Multiple Regression• Assumption (7) No perfect multicollinearity
– no explanatory variable is an exact linear function of other X’s– Venn diagram
• Other implicit assumptions – data are a random sample of n observations from proper population– n > K– the little xij’s are fixed numbers (the same in repeated samples) or they are realizations of random variables, Xij, that are independent of error term & then inference is done CONDITIONAL on observed values of xij’s
Nature of Serial Correlation• Violation of (4)•
• Error in period t is a function of error in prior period alone: first-order autocorrelation, denoted AR(1) for “autoregressive” process
• Usual assumptions apply to new error term
• is positive serial correlation• is negative serial correlation
Nature of Serial Correlation• Error in period t can be a function of error in more
than one prior period • Second-order serial correlation
• Higher orders generated analogously • Seasonally-based serial correlation
Causes of Serial Correlation• The error term in the regression captures
• Measurement error• Omitted variables, that are uncorrelated with the
included explanatory variables (hopefully)• Frequently factors omitted from the model are correlated over
time
1. Persistence of shocks• Effects of random shocks (e.g., earthquake, war, labor
strike) often carry over through more than one time period2. Inertia
• times series for GNP, (un)employment, output, prices, interest rates, etc. follow cycles, so that successive observations are related
Causes of Serial Correlation3. Lags
• Past actions have a strong effect on current ones• Consumption last period predicts consumption this period
4. Misspecified model, incorrect functional form5. Spatial serial correlation
• In cross-sectional data on regions, a random shock in one region can cause the outcome of interest to change in adjacent regions
• “Keeping up with the Joneses”
Consequences for OLS Estimates• Using an OLS estimator when the errors are autocorrelated
results in unbiased estimators• However, the standard errors are estimated incorrectly
– Whether the standard errors are overstated or understated depends on the nature of the autocorrelation
– For positive AR(1), standard errors are too small!– Any hypothesis tests conducted could yield erroneous results– For positive AR(1), may conclude estimated coefficients ARE
significantly different from 0 when we shouldn’t !• OLS is no longer BLUE
– A pattern exists in the errors • Suggesting an estimator that exploited this would be more efficient
Detection of Serial Correlation• Graphical
Detection of Serial Correlation• Graphical
no obvious pattern—the errors seem
random. Sometimes, however,
the errors follow a pattern—they are correlated across
observations, creating a situation in which
the observations are not independent with
one another.
Here the residuals do not seem
random, but rather seem to follow a
pattern.
Detection of Serial Correlation
Detection: The Durbin-Watson Test• Provides a way to test
H0: = 0• It is a test for the presence of
first-order serial correlation• The alternative hypothesis
can be– 0– > 0: positive serial
correlation• Most likely alternative in
economics– < 0: negative serial
correlation• DW Test statistic is d
Detection: The Durbin-Watson Test• To test for positive serial correlation with the
Durbin-Watson statistic, under the null we expect d to be near 2– The smaller d, the more likely the alternative
hypothesisThe sampling distributionof d depends on the values of the explanatory variables. Since every problem has a different set of explanatory variables, Durbin and Watson derived upper and lower limitsfor the critical value of the test.
Detection: The Durbin-Watson Test• Durbin and Watson derived upper and lower
limits such that d1 d* du
• They developed the following decision rule
Detection: The Durbin-Watson Test• To test for negative serial correlation the decision
rule is
• Can use a two-tailed test if there is no strong prior belief about whether there is positive or negative serial correlation—the decision rule is
Serial Correlation• Table of critical values for Durbin-Watson statistic (table E11, page 833 in BLK textbook)•http://hadm.sph.sc.edu/courses/J716/Dw.html
Serial Correlation Example• What is the effect of the price of oil on the number of wells drilled in the U.S.?•
Year
Total Wells Drilled
real price per bbl
Average Price per bbl
Producer Price Index
1930 212327.98657
7 1.19 14.9
1931 12432 5.15873 0.65 12.6
1932 150407.76785
7 0.87 11.2
1933 123125.87719
3 0.67 11.4
1934 189177.75193
8 1 12.9
1935 214207.02898
6 0.97 13.81987 3519414.9805
4 15.4 102.8
1988 32479 11.76801 12.58 106.9
1989 2782414.1354
7 15.86 112.2
1990 27941 17.2227 20.03 116.3
1991 2996014.1630
9 16.5 116.5
Serial Correlation Example• What is the effect of the price of oil on the number of wells drilled in the U.S.?•
Serial Correlation Example• Analyze residual plots … but be careful …
Serial Correlation Example• Remember what serial correlation is …
• This plot only “works” if obs number is in same order as the unit of time
Serial Correlation Example• Same graph when plot versus “year”
• Graphical evidence of serial correlation
Serial Correlation Example• Calculate DW test statistic• Compare to critical value at chosen sig level
– dlower or dupper for 1 X-var & n = 62 not in table– dlower for 1 X-var & n = 60 is 1.55, dupper = 1.62
• Since .192 < 1.55, reject H0: = 0 in favor of H1: > 0 at α=5%
ObservationPredicted Total Wells Drilled Residuals e(t-1) e(t) - e(t-1) (e(t)-e(t-1))^2 e(t)^2 Year
1 31744.01844 -10512.01844 110502532 1930
2 24780.30007 -12348.30007 -10512 -1836.28 3371930.199 152480515 1931
3 31205.40913 -16165.40913 -12348.3 -3817.11 14570321.58 261320452 1932
4 26549.55163 -14237.55163 -16165.4 1927.857 3716634.527 202707876 1933
5 31166.20738 -12249.20738 -14237.6 1988.344 3953512.848 150043081 1934
6 29385.89982 -7965.899815 -12249.2 4283.308 18346723.71 63455559.9 1935
61 54488.44454 -26547.44454 -19062 -7485.46 56032054.78 704766811 1990
62 46953.99846 -16993.99846 -26547.4 9553.446 91268331.83 288795984 1991
SUM 1257013355 6517936259