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Arthur Campbell
MIT
Introduction to Econometrics
02/16/07
1 / 19
Todays Recitation
What is a Regression?
Regression Equation
Regression Coe cients, Standard Errors, T-statistics, Level of
Signicance, R 2 values
Interaction terms
Introduction to Econometrics
02/16/07
2 / 19
What is a Regression?
Introduction to Econometrics
02/16/07
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What is a Regression?
Introduction to Econometrics
02/16/07
4 / 19
E
Figure by MIT OCW and adapted from:
Sykes, Alan. "An introduction to regression analysis." Chicago Working Paper in Law and Economics 020 (October 1993): 4.
Introduction to Econometrics
02/16/07
5 / 19
E
Figure by MIT OCW and adapted from:
Sykes, Alan. "An introduction to regression analysis." Chicago Working Paper in Law and Economics 020 (October 1993): 7.
Introduction to Econometrics
02/16/07
6 / 19
1 Xi )2
This determines the values of 0 and 1 and hence the position of the
line
There are many potential criteria we could use such
min jyi
0 1
1 Xi j
Introduction to Econometrics
02/16/07
7 / 19
I
E
I
If for instance 1 = E
= 15, 000 this would imply that for every
additional year of schooling an individual would on average earn
$15,000 more
For a given level of income and education we could now work out the
elasticity of income wrt education
Introduction to Econometrics
02/16/07
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Introduction to Econometrics
02/16/07
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Introduction to Econometrics
02/16/07
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Multivariable regression
The regression may in fact contain more than one explanatory variable
For instance we might think that a persons income is inuenced by
both the number of years of education and the number of years
experience in the labour force
In this case we might run the following multi-variable regression
I = 0 + 1 E + 2 L
Here we can nd the eect education and labour force experience on
income separately
Introduction to Econometrics
02/16/07
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Results of a regression
Basic Model: Double Log
1975-1980
o
2001-2006
Continued...
-0.615
-1.697***
Jul
0.031***
0.040***
In(P )
-0.335***
-0.042***
Aug
0.042***
0.046***
In(Y )
0.467***
0.530***
Sep
-0.028***
-0.039***
Jan
-0.079***
-0.044***
Oct
0.002
Feb
-0.129***
-0.122***
Nov
Mar
Apr
May
Jun
(0.929)
(0.024)
(0.096)
(0.010)
(0.019)
-0.019***
(0.006)
-0.021
(0.016)
0.013
(0.011)
0.020
(0.010)
(0.587)
(0.009)
(0.058)
(0.006)
(0.010)
(0.010)
(0.010)
(0.006)
(0.005)
(0.004)
(0.005)
0.008
(0.010)
(0.005)
-0.058***
-0.032***
(0.012)
(0.004)
-0.008
j's
-0.024***
R2
0.85
0.94
0.027
0.011
(0.005)
(-0.005)
0.026***
(0.004)
0.000
***(p
< 0.01)
(0.004)
Figure by MIT OCW and adapted from: Hughes, J., C. Knittel, and D. Sperling. "Evidence of a shift in the short-run price elasticity of gasoline demand."
Center for the Study of Energy Markets Working Paper 159 (2006): Table 1.
Introduction to Econometrics
02/16/07
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Introduction to Econometrics
02/16/07
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Introduction to Econometrics
02/16/07
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t-statistic
s
The magnitude of this term not the sign is what is important since
can be positive or negative
Introduction to Econometrics
02/16/07
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Introduction to Econometrics
02/16/07
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Goodness of t (R-squared)
The goodnesss of t measure R 2 is a measure of the extent to which
the variation of the dependent variable is explained by the explanatory
variable(s).
The formula for it is
R2 = 1
R2 = 1
Introduction to Econometrics
02/16/07
17 / 19
Adjusted R-squared
An obvious way to increase the R 2 of a regression is to simply
increase the number of explanatory variables since including
additional variables cannot decrease its explanatory power
The adjusted R 2 is a measure of explanatory power which is adjusted
for the number of explanatory variables included in the regression
The formula for the adjusted R 2 is
2
RAdjusted
=1
R2
n
n
1
m
Introduction to Econometrics
02/16/07
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QD P
P
= ( 1 + 3 Y )
P Q
QD
Introduction to Econometrics
02/16/07
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