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Introduction

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Unit Synopsis

Topic 1: Concepts

ETF3600 Quantitative Models for Business Research

Lecture 1: Introduction & Review

March 1, 2013

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Introduction

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Topic 1: Concepts

Introduction Motivation Unit Synopsis Topic 1: Concepts Basic Mathematics Basic Statistics

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Introduction

Motivation

Unit Synopsis

Topic 1: Concepts

ETF3600/5600 - Quantitative Models for Business Research

Lecturer: Dr. Kompal Sinha [kompal.sinha@monash.edu] Lecture Room: CA H/H235 Monday 4:00pm - 6:00pm. Tutorial
Tutorials: Monday 3:00-4:00pm CA K/K101

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Introduction

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Unit Synopsis

Topic 1: Concepts

Quantitative Models and Business Research

...[marketing] research is the collection, processing, and analysis of information on topics relevant to marketing. It begins with problem denition and ends with a report and action recommendations.

- Lehmann et al (1998) Collect data Collate data Analyse data Interpret nding & Decision making Data collection and storage techniques have advanced in recent times. Growing market competition required analysing these huge databases:
Data analysis is more than number crunching. For eective policy making it is important to eciently translate technical information to eective decision making.

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Quantitative Models for Business Research

Decision making = Expert Judgement + Quantitative Analysis Decision making = 1 Expert Judgement + 2 Quantitative Analysis 1 + 1 = 1 Quantitative analysis provide basic quantitative concepts and skills that form the base of knowledge essential to quantitative-decision-making professionals in business environment.

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Introduction

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Quantitative Models for Business Research

Why study ETF 3600/5600

.There is no such thing as qualitative data. Everything is either 0 or 1.

- Fred Kerlinger Traditional regression tools simple regression models useful when response variable is continuous or measured at continuous intervals: GDP, Sales, prots. Many salient variables in business research, social science, biomedical science are not continuous, i.e., they are either qualitative or limited in their range:
Revealed preference data: sales and brand choice Categorical: yes or no; employed or unemployed These variables are limited in their range because of some underlying stochastic choice mechanism:
agree, disagree, uncertain; poor, good excellent

The general regression models are inappropriate and give misleading answers - poor implications and ineective decisions

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Introduction

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Topic 1: Concepts

Quantitative Models for Business Research - Unit Synopsis

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Introduction

Motivation

Unit Synopsis

Topic 1: Concepts

Quantitative Models for Business Research - Unit Synopsis

This unit will discuss models that are appropriate when the dependent variable is binary, ordinal, nominal, counted, censored, truncated, latent. Using E-Views to analyse data. Theoretical concepts with empirical applications for the models:
The nature of model Type of data for which it is relevant Type of information one can get from estimating it:
Probability of given value Expected value Marginal eects Odds Ratio Discrete change Interpretation

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Lecture Topics
Week 2: Review of regression analysis; Week 3: 3.1 Introduction to maximum likelihood
3.2 Models with binary dependent variable (1) Introduction, Linear Probability Model

Week 4: Models with binary dependent variable (2)

4.1 Logit model 4.2 Probit model.

Week 5: Models with binary dependent variable (3)

5.1 Probit model (cont) 5.2 Inference.

Week 6: Models with binary dependent variable (4)

6.1 Latent variable for binary dep. variable. Model with ordered multinomial dependent variable 6.2 The ordered probit model 7.1 The ordered probit model (cont) Models with unordered multinomial dependent variable (1) 7.2 Introduction: Logit model for multiple choices

Week 7:

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Lecture Topics
Week 8:
Models with unordered multinomial dependent variable (2) 8.1 Logit model for multiple choices (cont) 8.2 Post estimation analysis Models with unordered multinomial dependent variable (3) 9.1 Example for conditional logit model 9.2 Post estimation analysis Models for count data (1) 10.1 The model using Poisson distribution 10.2 The problems of truncation and censoring Models for count data (2) 11.1 A test for overdispersion 11.2 The negative binomial and the zero modied count models The Tobit regression model (if time permits) Summary revision Information on Examination

Week 9:

Week 10:

Week 11:

Week 12:

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Studying this unit

How to study this unit Text Prescribed text: The prescribed text below is available from
the bookshop and the library
1

Long, J.S. (1997), Regression Models for Categorical and Limited Dependent Variables, SAGE Publications, London. (referred to as Long) Franses, P. H. and R. Paap (2003), Quantitative Models in Marketing Research, Cambridge University press: Cambridge. (referred to as FP) Powers, D.A. and Y. Xie (2000), Statistical Methods for Categorical Data Analysis, Academic Press, London. (referred to as Powers)

Recommended texts: Useful reference texts include

1

Come to lectures Prepare for tutorials Attend tutorials Ask for help

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Assessment Criteria

Inclass Test 5% Assignments: Assignment I 12% Assignment II 18% Final examination 65% The nal exam performance is the hurdle requirement for this unit and where you fail the unit solely because of failure to satisfy the hurdle requirement a nal mark of 45 will be returned. Please read unit outline for details.

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Introduction

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ETF3600/5600: Quantitative Models for Business Research

Topic 1: Some fundamental concepts

Reading: References
Wooldridge Appendix A-C, Franses and Paap Appendices A.1 and A.2 Hill, Griths and Lim Appendices A and B. Wooldridge, J.M. (2006), Introductory Econometrics: A Modern Approach, Thomson Higher Education: USA. Hill, R.C., W.E. Griths and G. Lim (2008), Principles of Econometrics, WileySons: USA Franses, P. H. and R. Paap (2003), Quantitative Models in Marketing Research, Cambridge University press: Cambridge.

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Topic 1: Some fundamental concepts

Outline

Basic Mathematics
1.1.1 1.1.2 1.1.3 1.1.4 1.1.5 1.1.6 Linear function Nonlinear function Derivatives Optimization Matrices Elasticity Random Variable Probability distribution and density function (pdf) Cumulative distribution function (cdf) Normal distribution Standard logistic distribution

Basic Statistics
2.1.1 2.2.2 2.2.3 2.2.4 2.2.5

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Basic Mathematics
1.1.1 Linear function

A linear relationship between two variables y = + x where = intercept , = slope = where is a very small change b= y x (3) y x (2) (1)

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Basic Mathematics.
1.1.2 Non linear function

1.1.2 A nonlinear function is used frequently are quadratic function, cubic function and higher order function. Quadratic : y = + x + x 2 Cubic : y = + x + x 2 + x 3 (4) (5)

For a given point on the curve, the slope is the slope of the tangent to the line at that point. It is calculated by nding
y x

for a given x.

A tangent line that is steeper has higher slope. For a nonlinear function, slope changes for dierent values of x.

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Basic Mathematics
1.1.2 Non linear function (2)

Some Useful functions 1 x ln(y ) = 1 + 2 ln(x ) y = 1 + 2 ln(y ) = 1 + 2 x y = 1 + 2 ln(x ) (6a) (6b) (6c) (6d)

For useful nonlinear functions see Hill, Griths and Lim page 471.

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Basic Mathematics
1.1.3: Slope of a curve and dierentiation

Consider y = f (x ) (7) First derivative is = dy dx = y is derivative of y with respect to x. The dy dx is the original notation used by Leibniz; the y is the Lagranges notation. The process of nding
dy dx

is called dierentiation.

Second derivative is to take derivative twice or y . d 2y d dy ( )= dx dx dx 2 (8)

First derivative gives the slope and second derivative gives the change in the slope when x changes.

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Basic Mathematics
Some Dierentiation Rules

Product rule (Leibniz rule): Consider y = uv d dv du (uv ) = u . + v. dx dx dx u Quotient rule: Consider y = v d u 1 du dv = 2 (v u ) dx v v dx dx Reciprocal rule: Consider y = 1/f (x ) y (x ) = 1 df (x ) [f (x )]2 dx

(9)

(10)

(11)

Addition and Subtraction rule: Consider y (x ) = u (x ) v (x ) dy du dv = (12) dx dx dx Power rule: Consider y = x n

n 1

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Basic Mathematics
Dierentiation Rules: Constant and Exponential function

Derivative of a constant is zero: Consider y = k dy dk = =0 dx dx Exponential Function: Consider y = e x dy de x = = ex dx dx Consider y = ke f (x ) dy de f (x ) df (x ) =k = ke f (x ) dx dx dx

(14)

(15)

(16)

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Basic Mathematics
Some Dierentiation Rules: Logarithmic function

Logarithmic Function Consider y = ln(x ) dy dln(x ) 1 1 = = dx = dx dx x x Consider y = lnf (x ) dy 1 df (x ) = dx f (x ) dx (18) (17)

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Basic Mathematics
Optimization

Optimization requires nding the extreme point (maximum and minimum value) of a quantity, or nding when maximum and minimum occur.
What to minimize cost want to maximize revenue.

Optimization method: An extreme point for a curve is where dy dx = 0 An extreme point can be a maximum or a minimum
Maximum if : d 2y 0 dx 2 d 2y 0 dx 2 (19)

Minimum if:

(20)

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Basic Mathematics
Matrices

Matrices are rectangular arrays of numbers or symbols. The dimension of a matrix is stated as the number rows by number of columns. Identity matrix is a square matrix in which every element is zero except those on the main diagonals whose values are one. The transpose of a matrix is the matrix obtained by writing the row of any matrix as columns. Matrix addition or subtraction: To add or subtract two or more matrices all matrices must have exactly the same dimensions. All elements of the two matrices can be added as any scalar. Matrix multiplication: Matrix A multiply by matrix B as AB is only possible if number of rows in A is the same as number of columns in B.

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Basic Mathematics
Elasticity

How change in one variable aects another variable i.e., the responsiveness of one variable with respect to another. Consider two variables: y = f (x ) elasy ,x = %y y y lny = = %x x x lnx (21) (22)

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Basic Statistics (Wooldridge Appendix B)

Random variable: A variable is a random variable if the value it may take is random or unpredictable or uncertain. Discrete versus continuous random variable:
A discrete random variable has a nite number of possible values. A continuous random variable has a continuum of possible values.

Probability distribution is a list of all possible values of the random variable and their corresponding probabilities. Probability distribution can be presented by
1 2 3

table (only for discrete random variable), equation or graph.

Consider k possible values x1 , x2 , K ..., xi , K , xk . Let Pr (x = xi ) be probability that x = xi Probability must satisfy two criteria:
1 2

0 Pr (x = xi ) 1 and Pr (x = xi ) = 1 .

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Measures in Quantitative Statistics

Mean E (x ) =

Pr (x = xi ) =
i =1

(23)

Variance
Var(x) = E(xi E (x ))2 =
k i =1 (xi

E (x ))2 Pr (xi ) = 2

Standard Deviation =

Var (24)

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2.2.2/2.2.3 Density Functions

PDF Probability distribution is known as probability density function (pdf) f (x ) = Pr (x = xi ) (25)

If X is a continuous r.v then pdf of X is the function f (x ) such that for two numbers
b

P (a X b ) =
a

f (x )dx

(26)

CDF Cumulative distribution function (cdf) is related to pdf.

x

F (x ) = Pr (x xi ) =

f (s )ds

(27)

The cdf curve relates the range of possible values of x and the probability that Pr (x xi ) The curve starts from zero when x is small and ends at 1 when x is large. CDF has S shape.

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2.2.4 Normal Distribution

A normal random variable is a continuous random variable that can take on any values. The pdf curve has bell shape and symmetric around the mean. < x < f (x ) = 1 2 2 exp [(x )2 /2 2 ] (28)

where E (x ) = , var (x ) = 2 and =3.14159 The cdf is dened as

x

F (x ) = (x ) =

(2 )1/2 exp (t 2 /2)dt

(29)

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Standard Logistic Distribution

The pdf is: f (x ) = (x ) = where ( x ) The cdf is: F (x ) = (x ) = exp (x ) 1 + exp (x ) (31) exp (x ) (1 + exp (x ))2 (30)