University of California, Santa Barbara Economics 594SE: Advanced Econometrics Final Examination Answers: Computational Portion Friday, July

27 Time: 45 minutes MATLAB files that answer questions 1 -3 have been provided. 4. Type your answers to the following questions into MLResults.doc (below the table): a) Compare your estimates of b1, b2 and between the three different estimators. Does changing our distributional assumptions lead to large changes in our parameter estimates? Can you think of any reason why things turned out this way? Neither the estimated coefficients nor their standard errors change very much. Partly, this might be because all three error distributions we used are symmetric, with the entire real line as their domain. ML estimation when the error distribution has a bounded domain can be problematic because such models assume certain outcomes are literally impossible. Models with asymmetric error distributions (e.g. type I extreme value) can certainly be estimated, but interpretation of the estimated coefficients can be tricky, because changing the variance parameter usually changes the mean as well. b) Consider the hypothesis test for b1=0 at 95% confidence. Did this turn out the same in all three specifications? What about the test for b2=0? Comment. For both coefficients (b1 and b2) the hypothesis tests turn out the same, regardless of which error distribution is assumed. The likely reasons are the same as in part (a). c) Compare the maximized value of the log likelihood function across the three methods. Which of the methods fits the data best? Comment on whether it is appropriate to use a likelihood ratio test to compare the fit of these three models, and if so, describe how you would conduct such a test. The highest maximized log likelihood is for the Hyperbolic Secant Distribution. Note that these likelihoods are comparable across the three estimation techniques, so in the ML sense the model with the Hyperbolic Secant distribution fits the data best. However, it is not possible to use the likelihood ratio test to formally compare these models. This is because the models are not nested. None of these models is a special case of another (put differently, it is not possible to derive one from another by imposing restrictions). Relatedly, note that all three models have the same number of parameters, so in a certain sense the number of restrictions imposed in going from one model to the other (#r) is zero. So you couldnt even construct a sensible LR test statistic.