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# Econometrics 1

Assignment 2

## Due Date: November 28, 2017, 11.59 pm

Kanika Mahajan
Ashoka University

## The datasets are available at

http://fmwww.bc.edu/ec-p/data/wooldridge/datasets.list.html. Click on the
dataset to get the description of variables.

## Question 1 (25 marks)

Use the data given in wage1.dta le.
Consider the below specication:

## wage = b0 + b1 educ + b2 exper + b3 expersq + b4 f emale + b5 married + b6 nonwhite + u

a) (5 marks) Write down a model that allows the variance of u to dier between males and
females. The variance should not depend on other factors.

## Var for men is c0 and for women is c0 + c1

b) (5 marks) Estimate the above model using OLS estimation. Is the estimated variance of
the error term u higher or lower for females in this model.
Regress the estimated residual squares on indicator variable for women. The coecient of
female is negative. So, variance is lower for females.
c) (2 marks) Is the error term heteroscedastic in the above model? Discuss using an appro-
priate statistical test.
Whites's/B-P test for heteroscedasticity
d) (3 marks) Re-estimate the standard errors in the above model to make them robust to
heteroscedasticity. Comment on the change in results from part b).
No dierence in conclsions drawn
e) (5 marks) Suppose the variance of the error term is a linear function of all the explanatory
variables. Re-estimate the model using the Feasible Generalized Least Square Estimation.
Is there any change in conclusion from estimation in part b)

1
No change in conclusions
f) (5 marks) Suppose as a researcher you are interested in analyzing if married females earn
a dierent wage than unmarried females after controlling for education, experience and race.
Write down a specication that allows you to test for this hypothesis. Conduct a suitable
test for your hypothesis. Assume homoskedastic errorr term.

## wage = b0 +b1 educ+b2 exper+b3 expersq+b4 f emale+b5 married+b6 nonwhite+b7 f emale∗married+u

Test: b4 = b4 + b7
This is equivalent to the below test:
Test: b7 = 0

## Question 2 (15 marks)

Use the data given in volat.dta le. Variable rsp500 is the monthly return on the Standard
and Poors 500 stock market index, at an annual rate. This includes price changes as well as
dividends. Variable i3 is the return on three month Treasury-bills, and pcip is the percentage
change in industrial production; these are also at an annual rate.
a) (3 marks) Plot the line graph for rsp500. Describe.
Consider the below specication

## rsp500t = b0 + b1 pcipt + b2 i3t + ut

b) (3 marks) Estimate the above model using OLS. Test for presence of AR(1) serial corre-
lation in the residuals of the above model.
Yes AR(1) serial correlated residuals
d) (3 marks) Suggest a way to correct for serial correlation in residuals in part b) and show
the revised estimates of the specication using it.
Estimate using OLS and correct SE's (HAC)
PraisWinsten method: It only corrects for AR(1)
c) (6 marks) Obtain the residuals from the model in part b). Regress the estmated residuals
on their lag (1) and obtain et .

ut = ρut−1 + et

Is ρ large and signicant? Are the obtained errors (et ) from the above model serially corre-
lated? Should they be theoretically serially correlated if AR(1) is the true model for serial
correlation in residuals of part b)?
Yes et are serially correlated. They should not be correlated if AR(1) is the true structure.
ρ=0.24, Signicant rho yes but in terms of magnitude not very large.