You are on page 1of 9

The Normal Distribution

The normal family of distributions occurs much more often in


econometrics than any other parametric family.
One reason for this is that the sum of a large number of
independent random variables has an approximately normal
distribution.
Normal distributions are symmetrical about the mean, and the
normal probability curve is the familiar bell-shaped curve. The
mean, median, and mode are equal for this family of
distributions
Shape of the Normal Distribution

0.3

y0.2

0.1

0
-4 -2 2 u 4

Sisir Sarma 18.318: Introduction to Econometrics


Normal Distribution

• A normally distributed random variable X with


mean x and variance x2 is written as X ~ N(x,
x2).

• Standard Normal: A normally distributed random


variable Z with mean 0 and variance 1is written
as Z ~ N(0,1).

Sisir Sarma 18.318: Introduction to Econometrics


Normal Distribution

• The PDF of a normally distributed random


variable X with mean x and variance x2 is
given by
2
1 X   
1    i x
2  x 
P( X i )  e
2 2
• The PDF of a Standard Normal random variable
Z is given by 1  1 Z  2

P( Z i ) 
i
2
e
2
Properties of N.D.

• 1. The normal distribution curve is symmetrical


around its mean value.
• 2. The The PDF of the distribution is highest at
its mean value. That is, the probability of
obtaining a value of a normally distributed r.v. far
away from its mean value becomes
progressively smaller.
Properties of N.D. (cont.)

• 3. Approximately 68% of the area under the


normal curve lies between x   x
• Approximately 95% of the area under the
normal curve lies between  x  2 x
• Approximately 99.7% of the area under the
normal curve lies between
 x  3 x
Properties of N.D. (cont.)
• 4. A normally distributed random variable is fully
described by its two parameters: mean and
variance.
• 5. A linear combination of two or more normally
distributed random variables is itself normally
distributed.
• 6. For a normal distribution, skewness is zero
and kurtosis is 3.
Properties of N.D. (cont.)

• (Note: Skewness is (square of the 3rd


moment)/(cube of the 2nd moment) and kurtosis
is (fourth moment)/square of the 2nd moment)
• 7. Z-transformation:
• X ~ N(x, x2) then (X -x)/x. ~ N(0,1)
Useful Results
1. Suppose that X ~ N   ,  2  then the average value 
of a sample of N observations of X is also normally distributed.


That is,  ~ N  ,  N .
2

2. Central Limit Theorem: Suppose that X ~ unknown  ,  2  then the
average value  of a sample of N observations of X is approximately


 2
normally distributed.That is,  ~ N  , N . 
3. t Statistics: Suppose that X ~ N   ,  2  then the
t  statistic for the chance that  will be less than a
* X *

given value X is t = .
 