Lahore University of Management Sciences FINN 321 Econometrics

Spring 2012

Instructor Room No. Office Hours Email Telephone Secretary/TA TA Office Hours Course URL (if any)

Muhammad Asim 314 PDC Building TBA Muhammad.Asim@lums.edu.pk 8323 TBA TBA lms.lums.edu.pk

Course Basics Credit Hours Lecture(s) Recitation/Lab (per week) Tutorial (per week) Course Distribution Core Elective Open for Student Category Close for Student Category COURSE DESCRIPTION

4 Nbr of Lec(s) Per Week Nbr of Lec(s) Per Week Nbr of Lec(s) Per Week

Duration Duration Duration

100 Minutes

This course looks at a broad range of regression techniques that are frequently used in economics, operations, finance and marketing. In particular, we look at the criteria used to select a particular estimation method and the scenarios under which the OLS estimator becomes suboptimal. We will look at a range of empirical illustrations, including those related to time series and panel datasets, and become adept at using Stata, our software for the course.

COURSE PREREQUISITE(S) Statistics OR Probability and Statistics OR Statistics and Data Analysis Principles of Microeconomics

COURSE OBJECTIVES To enable students to interpret and critically evaluate econometric analysis reported in many studies in Finance and Economics To equip students to independently conduct and interpret their own econometric analysis To train in properly utilizing econometric analysis in decision making in Economics, Finance, Marketing and Operations.

Learning Outcomes On successful completion students will: be able to develop a suitable regression model for a variety of empirically interesting problems and validate the selected model via a battery of tests be able to compare different estimators based on their finite sample and asymptotic properties develop a basic understanding of time series econometrics and be able to handle and make use of panel data be proficient in the use of Stata for econometric analysis

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Grading Breakup and Policy Assignment(s): 20% Home Work: Quiz(s): 25% Class Participation: 5% Attendance: 5% Midterm Examination: Project: 15% Final Examination: 30% Project: The objective of the project is to provide you an opportunity to apply the skills you learn in class to a real world application. Several data sets will be made available to students for this purpose. The project would require you to pick a data set from this collection and write a short project based on your analysis. The project grade will be determined on the basis of an intelligent use of this data to address the research question and an appropriate interpretation of results. The project would be group-based and we may conduct viva from any of the group members. Students are encouraged to discuss their project with me (during office hours) or with their TAs.

Examination Detail Yes/No: No Combine Separate: Duration: Preferred Date: Exam Specifications:

Midterm Exam

Final Exam

Yes/No: Yes Combine Separate: Combine Duration: 100 minutes Exam Specifications: closed book/ closed notes

COURSE OVERVIEW Week/ Session/ Topics Module Introduction What is econometrics? Steps in empirical economic analysis Causality and Marginal effects 12 The structure of economic data Simple Regression Model Deriving the OLS estimates Units of measurement and functional form Multiple Regression: Estimation Mechanics and Interpretation of OLS Classical Linear Model Assumptions 35 The Gauss-Markov Theorem Properties of OLS Unbiasedness & Efficiency. Multiple Regression: Inference Sampling Distribution of the OLS estimators The t-test testing a single restriction Confidence Intervals Testing multiple restrictions

Recommended Readings Ch1. 1.1, 1.2, 1.4 Ch.2.1, 2.2, 2.4

Objectives/ Application Understand the scope of Econometrics and review regression basics

Ch. 3

Understand the fundamentals of multiple regression analysis, where we allow more than one variable to affect the variable we are trying to explain. Conduct statistical inference related to multiple regression models.

Ch. 4

6 7*

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89 Functional Form and Dummy Variables Dummy independent variables Using dummy variables for multiple categories Interactions using dummy variables Dummy dependent variable Topics in OLS Effects of Data Scaling Functional Form Goodness-of-Fit and Model Selection Prediction and Residual Analysis Functional form mis-specification Missing Data, Outliers Heteroskedasticity Consequences of Heteroskedasticity Robust inference Testing for heteroskedasticity Weighted Least Squares Ch. 7 Learn how to incorporate qualitative information into multiple regression models

Ch. 6.1, 6.2, 6.3, 6.4, 9.1, 9.4

10 12

Learn some additional topics in regression analysis, including advanced functional form issues, data scaling, prediction, goodness of fit, and data problems like presence of outliers

Ch. 8

13-14*

Be able to test for and correct the problem of heteroskedasticity, or non-constant variance, in the error terms

Instrumental Variable Estimation and 2SLS Correlation between X and error; Omitted variable bias (3.3); OLS under measurement 15 16 error (9.3); Using Proxy Variables for Unobserved Explanatory Variables (9.2); IV estimation and the 2SLS; Testing for endogeniety and over-identifying restrictions Regression with Time Series Data Nature of time series data; Examples of TS models; Finite sample properties of OLS under Gauss-Markov assumptions; Functional form, 17-20* dummy variables, index numbers; Trends and seasonality; Stationarity and weakly dependent time series; Using highly persistent time series in regression analysis Panel Data Models Pooling independent cross-sections across time; two-period panel data; differencing with 21-23 more than two time periods: fixed-effects estimation; random-effects models; grouped data; policy analysis (difference-in-difference and panel estimation) Limited Dependent Variable Models and Sample Selection Logit and Probit models for binary response; 24-26* [Depending on time: the Tobit model for corner-solution responses; Censored and Truncated regression;] Sample selection corrections Simultaneous Equation Models The nature of simultaneous equation models; 27 simultaneity bias in OLS; Identifying and estimating a structural equation (vs. reduced form); systems with more than two equations 28 Review * indicates tentative lab sessions

Ch 3.3, 9.2, 9.3, 15.1-15.5

Investigate the problem of endogenous explanatory variables and use the method of instrumental variables as a way of solving the omitted variable problem as well as the measurement error problem Analyze the problems unique to time series data and understand use of functional forms, dummy variables, trends and seasonality in the context of time series regression models

Ch. 10 & 11

Ch 13.1-13.5; 14.1-14.3

Apply multiple regression to independently pooled cross sections and panel data sets via methods commonly used in applied work

Ch 17.1-17.5 (excl. 17.3)

Apply models for limited dependent variables and methods for correcting sample selection bias

Ch 16.1-16.3

Apply the method of two stage least squares to estimate simultaneous equation models

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Textbook(s)/Supplementary Readings Required Text: Wooldridge, Jeffrey M. 2006. Introductory Econometrics. 3 edition. Thomson South-western. Supplementary Texts: Hamilton, Lawrence C. 2006. Statistics with Stata. Thomson Brooks/Cole. Kennedy, Peter. 2008. A Guide to Econometrics. 6 edition. Malden: Blackwell Publishing. Levitt, Steven D., and Stephen J. Dubner. 2009. Freakonomics: A Rogue Economist Explores the Hidden Side of Everything. Harper Perennial. Online Resources To learn STATA you may use: http://www.ats.ucla.edu/stat/stata/ STATA illustrations for all our text book examples are at: http://fmwww.bc.edu/gstat/examples/wooldridge/wooldridge.html The powerpoint slides for the book are also available at: http://www.swlearning.com/economics/wooldridge/wooldridge2e/powerpoint.html
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