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Welcome to Econometrics

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Why study Econometrics?

An empirical analysis uses data to test a theory or to estimate a relationship

A formal economic model can be tested

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Types of Data

Cross-sectional data is a random sample Each observation is a new individual, firm,

etc. with information at the same point in time

Time series data has a separate observation for each time period – e.g. daily stock prices of IBM over year 2005.

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Types of Data – Panel

If we pool cross sections and time series data together.

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To describe a single variable,

We may draw a histogram to see its disributions.

For time series variable, we can also plot a time-series plot.

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reurnN(0.0003829,0.025187)

Test statistic for normality:

Chi-squared(2) = 530.783 pvalue = 0.00000

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To describe relationship between variables

Scatter plot

Correlations, Regressions

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The Question of Causality

Simply establishing a relationship between variables does not necessarily imply causality.

Can be difficult to establish causality. Example, a person’ height and sister’s height are positively correlated, but none is causing the other.

Sometimes we do not care, so long as it is useful in forecasting. (example, dating)

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Advanced topics

To test whether a single variable follows some specific distribution, we can do a Q-Q plot against that distribution.To test relationship between two variables

1. Pearson correlation (the ordinary correlation you are already familiar with)

2. Spearman correlation (also called rank correlation)

If a Q-Q plot looks like a straight line, then

your variable may follow that distribution.

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