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SEMESTER 2, SESSION 2015/2016

FACULTY OF

ECONOMICS AND
BUSINESS

EBQ 2074: ECONOMETRICS


ASSESSMENT (PAIR WORK)
Prepared by:
No.

Name

Matric Num.

1.

Kwan Hui Ne

47228

2.

Hanis Shahirah Mohd Khairi

46928

Lecturers Name : Mdm. Dayang Haszelinna Abang Ali


Class

: Tuesday, 11a.m-2 p.m

SEMESTER 2, SESSION 2015/2016

EBQ 2074: ASSESSMENT


Question 1
Define:
i.

Sample
A sample is a set of data drawn from the population.

ii.

Population
Population is all items of interest in statistical problem such as mean and median. The
value for population may very large, and sometimes, infinitely large. In empirical
study, normally only samples of observations from population are available.

iii.

Variance
Variance is a measure of dispersion. It indicates how closely or widely individual X
values are spread, dispersed or distributed around the mean value.

iv.

Covariance
Covariance measures the linear association between X and Y measure how 2 random
variables vary or move together. The covariance between two random variables can be
either positive, zero or negative.

v.

Correlation
The correlation measures how strongly two variables related or associated with each
other. Correlation close to +1, means 2 variables are very strongly positively
correlated. Correlation close to -1, means 2 variables are very strongly negatively
correlated. Correlation close to zero, means 2 variables are not related.

vi.

Coefficient of Determination
Coefficient determination is a statistical meausres of how well the regression line
approximates real data points or gives information about model goodness of fit.

Question 2
From a sample of 209 firms, Wooldridge obtained the following regression results:
log ( ^
salary ) =4.32+0.280 log ( sales ) +0.0174 roe+0.00024 ros
se = (0.32)
R2 = 0.283

(0.035)

(0.0041)

(0.00054)

t0.05 = 1.96 F0.05 = 3.32

and where figures in the parentheses are the estimated standard errors.

SEMESTER 2, SESSION 2015/2016

i.

Interpret the preceding regression.


The estimated salary is RM 4.32 when sales, roe and ros is zero (0). In every 1 %
increase in sales will lead to 28% increase in salary, with other factors is held constant.
This estimated coefficient is statistically significance and has a positive relationship
between sales and gain in salary.
In every 1% increase in roe, salary will increased by 1.74%, with other factors held
constant. This indicates that roe and salary has a positive relationship.
In every 1% increase in ros will lead to RM 0.00024 increase in salary with other
factors held constant. This indicates that ros and salary has a positive relationship.

ii.

Which of the coeeficients are individually statistically significant at the 5% level?


H0 : 1=0
Ha : 1 0
t = b1/se(b1)
= 4.32 / 0.32
= 13.5
Since 13.5 > 1.96, we reject H0.
Thus, the constant coefficient is statistically insignificant at 5% level of significance.
H0 : 2 = 0
Ha : 2 0
t = b2/se(b2)
= 0.280/0.035
=8
Since 8 > 1.96, we reject H0.
Thus, the coefficient for sales is statistically insignificant at 5% level of significance.
H0 : 3 = 0
Ha : 3 0
t = b3/se(b3)
= 0.0174/0.0041
= 4.2439
Since 4.2349 > 1.96, we reject H0.
Thus, the coefficient for roe is statistically insignificant at 5% level of significance.
3

SEMESTER 2, SESSION 2015/2016

H0 : 4 = 0
Ha : 4 0
t = b4/se(b4)
= 0.00024/0.00054
= 0.4444
Since 0.4444 < 1.96, we do not reject H0.
Thus, the coefficient for ros is statistically significant at 5% level of significance.

iii.

What are R2 = 0.283 implies for?


R2 0.283 implies that 28.3% in total variation of salary can be explained by sales. This
model is considered not good model.

iv.

What is the overall significance of the regression? Which test do you use? And why?
H0 : 1=2=3= 4=0
Ha : 1 2 3 40

F = [R2/k-1] / [(1-R2)/n-k]
= [0.283/4-1] / [(1-0.283)/209-4]
= 26.971
Critical F value = F(k-1,n-k) = F(3,205) = 3.32. Since Fcalculated=26.971 > Fcritical=3.32,
we reject H0.
Thus, not all coefficients are equal to zero.
Test used is F-test. This is because F-test can assess multiple coefficients
simultaneously unlike t-test.

Question 3

SEMESTER 2, SESSION 2015/2016

Below is the demand for money function for India for the periods 1948 to 1965:
^
ln M t=1.60270.1024 ln R t +0.6869 ln Y t +0.5284 ln M t 1
se = (1.4024)

(0.3678)
R2 = 0.9227

(0.3427)

(0.2007)

d = 1.8624

where; M = real cash balances


R = the long-term interest rate
Y = the aggregate real national income
i.

With the 5% lower and upper d values are 0.933 and 1.696, the estimated d value
of 1.8624 indicates that there is no positive autocorrelation. Can we trust the
computed d to find out whether there is serial correlation in our data? Why?

0.933

1.696

d = 1.8624

Yes. We can trust the computed d to find out whether there is serial correlation in
our data. This is because as we can see from the above figure, the value of d is near
to 2. Thus, there is no positive autocorrelation.

ii.

Compute Durbin h statistic and comment on the result.

Durbinh= 1

1.8624
2

18
) 118(0.2007
)
2

0.5567

At 5% level of significance, Z (2 tails) is 1.96


5

SEMESTER 2, SESSION 2015/2016

H 0=There is no first order autocorrelation


H a=There is first order autocorrelation

We reject null hypothesis if h > +1.96 and h < -1.96


Since h < +1.96, so we do not reject null hypothesis
So we can conclude that there is no first order autocorrelation
iii.

Define two sources/reasons for autocorrelation.


a) Inertia in data series (in unemployment models it was termed hysterisis- long
term inertia in people being unemployed.
b) Cobweb Phenomenon (In agricultural market, the supply reacts to price with a lag
of one time period because supply decisions take time to implement correlated)

iv.

List two consequences of autocorrelation.


a) Serial correlation causes OLS to no longer be the minimum variance estimator
(of all the linear unbiased estimators)
b) If the disturbance term is are autocorrelated then the OLS variance is greater than
variances of estimate calculated by other method therefore the useal of t and f of
the significance are no longer valid

Question 4
The results from the Granger Causality test between Y and X for the period of 1960 1999, as
follows:
Yt = 0.3425Xt + 0.5046Xt-1 + 0.1485Xt-2 + 0.0911Xt-3 + 0.0255Yt-1
R2 = 0.8823
RSS = 210.24
Yt = 0.4515Yt-1 + 0.3272Xt
R2 = 0.9634
RSS = 265.13
Xt = 0.3397Yt + 0.8460Yt-1 + 0.6524Yt-2 + 0.4947Yt-3 + 0.0.0153Yt-4 + 0.0268Yt-5 + 0.0432Xt-1
R2 = 0.7724
RSS = 143.21
Xt = 0.3216Xt-1 + 0.0546Yt
R2 = 0.8956
RSS = 157.43
i.

Define Granger Causality.

SEMESTER 2, SESSION 2015/2016

The granger causality test is a statistical hypothesis test for determining whether one
time series is useful in forecasting another. According to the Granger causality, if a
one variable as the dependent variable (Y) and another as explanatory variable (X),
we made an implicit assumption that changes in the X will eventually induce the
changes in the Y. That is the notion of causality in which information about X is
expected to affect the conditional distribution of the future values of Y.
ii.

Determine whether X Granger cause Y. (c.v = 2.81)


H 0=X does not granger cause Y

H a= X granger cause Y

RSS
( RRSSUR )
m
RSSUR
(nk )
Ftest =

(265.13210.24)
3
F=
210.24
( 405)
F 3.046
C.V = 2.81
We reject null hypothesis if F-test> C.V
Since F=3.046 > C.V = 2.81, so we reject null hypothesis
Hence, we can conclude that X granger cause Y.
iii.

Test for the causality that running from Y to X. (c.v = 2.71)


H 0=Y does not granger cause X

H a=Y granger cause X

SEMESTER 2, SESSION 2015/2016

157.43143.21
5
F=
143.21
407
F 0.655
C.V = 2.71
We reject null hypothesis if F-test> C.V
Since F=0.655 < C.V = 2.71, so we do not reject null hypothesis
Hence, we can conclude that Y does not granger cause X.

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