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Financial Econometrics

A new branch of econometrics
An application of econometrics in the field of
finance/financial economics
An indispensable tool for students specializing in
the fields of finance, financial economics and
economics of money and banking.
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Ch1: Introduction
1.What is econometrics?
2.Why a separate discipline?
3.Methodology of econometrics
4.What is financial econometrics?
5.Econometric software packages
6.Econometrics development in China
7. Microfit 4.0 demo
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1. What is econometrics

Definition of econometrics:
Literally interpreted, econometrics means
economic measurement.
The term econometrics first came into
prominence with the formation in the early 1930s
of Econometric society and the founding of the
journal Econometrica.
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1.What is Econometrics
Samuelson(1954): Econometrics may be defined the
application of mathematical statistics to economic data to
lend empirical support to the models constructed by
mathematical economics and to obtain a numerical
estimates
Goldberger(1964): Econometrics may be defined as the
social science in which the tools of economic theory,
mathematics, and statistical inference are applied to the
analysis of economic phenomena.
Johnston(1984): The basic task of econometrics is to put
empirical flesh and blood on the theoretical structures.
In short, Econometrics is an amalgam of economic
theory, mathematical economics, economic statistics, and
mathematical statistics.

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2.Why a separate discipline
Econometrics vs. economic theory
Econometrics vs. mathematical economics
Econometrics vs. economic statistics
Econometrics vs. mathematical
econometrics
http://www.almaz.com/nobel/
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3.Methodology of econometrics
Statement of theory or hypothesis
Specification of the econometric model of the
theory
Obtaining the data
Estimation of the parameters of the econometric
model
Hypothesis testing
Forecasting or prediction
Using the model for control or policy purposes
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4.What is financial econometrics
Definition:
It is the application of econometrics in the
fields of finance, financial economics and
economics of money and banking.
An example:
The demand for money function

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Demand for Money
Gregory Chow(1966)


where M = natural logarithm of total money stock
Yp = natural logarithm of permanent income
Y = natural logarithm of current income
R = natural logarithm of rate of interest
Taylor and Newhouse(1969)

(.0540) (.13897) (.148)
9965 . 7476 . 01321 . 069 . 1 1365 .

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R R Y Y M
t t pt t
(.0669) (.0597) (.0940) (.14284)
9988 . 5878 . 3325 . 3274 . 06158 . 3067 .

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1 5 4 3 2 1

R M R Y Y M
M R Y Y M
t t t pt t
t t t t pt t

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5.Econometric software packages
A brief introduction to econometric
software packages
http://www.statforum.com/
An introduction to Microfit and Eviews
Microfit demo
Eviews demo

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6.Econometrics in China
Econometrics development in China
1980 Beijing
American Prof. Lawrence Klein (1980)
1998
Financial econometrics in China
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7.Microfit 4.0 demo
Introduction
An example:
Discouraged-worker hypothesis vs. Added-
worker hypothesis
Discouraged-worker hypothesis: When economic
conditions worsen, as reflected in a higher
unemployment rate, many unemployed workers
give up hope of finding a job and drop out of the
labour force.


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7. Microfit 4.0 demo
Added-worker hypothesis: When economic conditions
worsen, many secondary workers who are not currently in
the labour market may decide to join the labour force if
the main breadwinner in the family loses his or her job.
Even if the jobs those secondary workers get are lowly
paid, the earnings will make up some of the loss in
income suffered by the primary breadwinner.
In this demonstration, we examine the relationship
between the dependant variable, U.S. Civilian Labour
Force Participation Rate (CLFPR, %) and the independent
variables, Civilian Unemployment Rate (CUNR, %) and
Real Average Hourly Earnings (AHE82, 1982 $).

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7. Microfit demo

Scatter diagram
Linear regression model
u AHE CUNP CLFPR
u AHE CUNP CLFPR
u CUNP CLFPR



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