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BEE2006: Statistics and Econometrics
Tutorial 2: Time Series - Regression Analysis and Further Issues(Part 1)
February 1, 2013
Tutorial 2: Time Series - Regression Analysis and Further Issues (Part 1)BEE2006: Statistics and Econometrics
10.1 (a)
Like cross-sectional observations, we can assume that most timeseries observations are independently distributed.
Do you Agree or Disagree?
Tutorial 2: Time Series - Regression Analysis and Further Issues (Part 1)BEE2006: Statistics and Econometrics
Consider the following two models
Returni = !0 + !1GDPi + ui
Returnt = !0 + !1GDPt + ut
Returni is the stock market returns at time t of country i
Returnt is the stock market returns of country i at time t
GDPi is the GDP at time t of country i
GDPt is the GDP of country i at time t
Would it be natural to expect:
Corr (ui , us |GDP) = 0 !i "= s
Corr (ut , us |GDP) = 0 !t "= s
Suppose that if the stock market drastically decreased inperiod t # 1 ( think about some oil shock ut!1), thegovernment afraid of recession actively intervenes and shocksthe stock market with some stimulus ut .
ut = "0 + "1ut!1 + et
then we’ll have autocorrelation.
Would it be natural to expect:
ui $ N!
0,#2"
ut $ N!
0,#2"
A lot of research in time series is devoted to the idea ofAutoregressive conditional heteroskedasticity
#2t = "0 + "1e
2t!1 + ..+ "qe
2t!q + $1#
2t!1 + ...+ $p#
2t!p
Example of clustering:
10.1(b)
The OLS estimator in a time series regression is unbiased underthe first three Gauss-Markov assumptions.
Do you Agree or Disagree?
Tutorial 2: Time Series - Regression Analysis and Further Issues (Part 1)BEE2006: Statistics and Econometrics
The first three assumptions:
yt = !0 + !1x1t + ....+ !kxkt + ut
Assumption 1: Linear in Parameters
Assumption 2:
E (ut |X) = 0 t = 0, 1, 2, ..., n
E (ut |x1t , ...., xkt ) = E (u|xt) = 0
Assumption 3: No perfect Collinearity
Corr (xjt , xit) "= 1 j "= i and t = 1, 2, 3, ..., n
THEN THE OLS IS UNBIASED
10.1(c)
A trending variable cannot be used as the dependent variable inmultiple regression analysis.
Do you Agree or Disagree?
Tutorial 2: Time Series - Regression Analysis and Further Issues (Part 1)BEE2006: Statistics and Econometrics
Suppose your model yt = !0 + !1xt + ut looks like this
There is obviously at time trend (upward) you should have considerthis model:
yt = !0 + !1xt + !2t + ut
Then !2 captures the changes in yt caused by xt isolating forthe time trend
10.1(d)
Seasonality is not an issue when using annual time seriesobservations.
With annual data, each time period represents a year and isnot associated with any seasons.
Tutorial 2: Time Series - Regression Analysis and Further Issues (Part 1)BEE2006: Statistics and Econometrics
10.2
Let gGDPt denote the annual percentage change in gross domesticproduct and let intt denote a short-term interest rate.
gGDPt = "0 + $0intt + $1intt!1 + ut
Assume that:
E (ut |intt , intt!1, intt!2, ..., int0) = 0
Cov (ut , intt) = 0 for t, t # 1, t # 2, t # 3, ..., 0
Tutorial 2: Time Series - Regression Analysis and Further Issues (Part 1)BEE2006: Statistics and Econometrics
Suppose that the Federal Reserve seeks to control interest rate bythe rule
intt = %0 + %1 (gGDPt!1 # 3) + vt
%1 > 0
Corr (vt , ut) = 0 for all t
Corr (vt , intt) = 0 for all t
show thatCov (ut!1, intt) "= 0
and as a consequence
E (ut |int) "= 0
since E (ut!1|int) "= 0
FromgGDPt = "0 + $0intt + $1intt!1 + ut
we can get
gGDPt!1 = "0 + $0intt!1 + $1intt!2 + ut!1
then
intt = %0 + %1 ("0 + $0intt!1 + $1intt!2 + ut!1 # 3) + vt
Rearranging we have that
intt = (%0 + %1"0 # 3%1)+%1$0intt!1+%1$1intt!2+%1ut!1+vt
Now findCov (ut!1, intt) =
Cov (ut!1, (%0 + %1"0 # 3%1) + %1$0intt!1 + %1$1intt!2 + %1ut!1 + vt)
Recall that:
Cov (ut!1, intt!1) = 0Cov (ut!1, intt!2) = 0Cov (ut!t , vt) = 0
Cov (ut!1, intt) = Cov (ut!1, %1ut!1) = %1V (ut!1)
Assume that V (ut!1) = #2 homoskedasticity
ThenCov (ut!1, intt) = %1#
2 "= 0
since %1 > 0
10.6(a)
Consider the following General Model:
yt = "0 + $0zt + $1zt!1 + $2zt!2 + $3zt!3 + $4zt!4 + ut
Now assume that we have a specific polynomial distributionlag
$j = %0 + %1j + %2j2
where j are the quadratic lag. Eg. $2 = %0 + %12 + %222
Plug $j into the model and rewrite the model in terms ofparameter %h for h = 0, 1, 2
Tutorial 2: Time Series - Regression Analysis and Further Issues (Part 1)BEE2006: Statistics and Econometrics
We Know that:
$0 = %0
$1 = %0 + %1 + %2
$2 = %0 + 2%1 + 4%2
$3 = %0 + 3%1 + 9%2
$4 = %0 + 4%1 + 16%2
Rewrite the model we get
yt = "0 + %0 (x1t) + %1 (x2t) + %2 (x3t) + ut
wherex1t = zt + zt!1 + zt!2 + zt!3 + zt!4
x2t = zt!1 + 2zt!2 + 3zt!3 + 4zt!4
x3t = zt!1 + 4zt!2 + 9zt!3 + 16zt!4
10.6(b)
Explain the regression you would run to estimate %h
Tutorial 2: Time Series - Regression Analysis and Further Issues (Part 1)BEE2006: Statistics and Econometrics
Run the OLS estimation
yt = "0 + %0 (x1t) + %1 (x2t) + %2 (x3t) + ut
we will find %̂h thereafter we can find
$̂j = %̂0 + %̂1j + %̂2j2
10.6(c)
The Polynomial distribute lag model is a restricted version of thegeneral model. How many restriction are imposed? How would youtest these?
Tutorial 2: Time Series - Regression Analysis and Further Issues (Part 1)BEE2006: Statistics and Econometrics
Recall that the General Model: (Unrestricted Model)
yt = "0 + $0zt + $1zt!1 + $2zt!2 + $3zt!3 + $4zt!4 + ut
has 6 variables and the Polynomial Model (restricted Model)
yt = "0 + %0x1t + %1x2t + %2x3t + ut
only has 4 variable.
Simply run the restricted model and find the R2ur and the restricted
model to find R2r . There are hence:
Two restrictions, moving from the unrestricted to restrictedmodel
We don’t have to really concern ourselves about what therestrictions might be but we know that there are tworestrictions
Fstat =(R2
ur!R2u)/2
(1!R2ur )/(n!6) $ F2,n!6