ECA5103QuantitativeandComputingMethods(2013/14SemI)

AnswerstoAssignment3
1. (i)

1 =

xi yi

2
i

x ( x + u ) = + x u
x
x
i

1 i
2
i

i i
2
i

xi E (ui | X i ) = ,
E ( 1 | xi ) = 1 +
1
xi2
Usinglawofiteratedexpectations E ( 1 ) = Ex [ E ( 1 | xi )] = Ex ( 1 ) = 1 .Unbiased.

1
xiui
n

p lim 1 = 1 +
= 1
1
p lim xi2
n
p lim

NumeratorconvergestothecovariancebetweenXandu,whichisassumedzerobythe
conditionE(u|X)=0anddenominatorconvergestothevarianceofX,assumedaconstant.
(ii)

(a) E (ui ) = Ex [ E (ui | xi )] = Ex (0) = 0 .

(b)Populationregressionis E (Yi | X i ) = 0 + 1 X i + E (ui | X i ) = 0 + 1 X i if E (ui | X i ) = 0 .
Note: Cov(ui , X i ) = E (ui X i ) E (ui ) E ( X i ) = E (ui X i ).
Usingthelawofiteratedexpectation

E (ui X i ) = Ex [ E (ui X i | X i )] = Ex [ E (ui | X i ) X i ] = 0 .Therefore,

E (ui | X i ) = 0 Cov(ui , X i ) = 0. Theconverseisnotnecessarilytrue.
(c)If Cov(ui , X i ) 0 theestimatorisbiasedandinconsistent.Therearebiasedestimatorsbut
consistent,i.e.,asthesamplesizegrows,biasgoestozero,variancegoestozero.Thereare
threecaseswhere Cov(ui , X i ) 0 thatleadtobiasedandinconsistentestimators:

1.SimultaneitybetweenyandX

2.ErrorsinX(errorsinvariables)

3.OmittedvariablesthatarecorrelatedwithX.

Note:

1
xiui

Cov( X , u )
n

p lim 1 = 1 +
= 1 +
= 1 + xu 2x u = 1 + xu u
1
x
x
Var ( X )
p lim xi2
n
p lim

where xu isthecorrelationbetweenXandu.
(iii)

= ( X X ) 1 X y = ( X X ) 1 X ( X + u ) = + ( X X ) 1 X u

E ( ) = + E x [( X X ) 1 X E (u | X )] = ,usinglawofiteratedexpectations.

1
1
p lim = + p lim( X X ) 1. p lim( X u )] =
n
n
1
n

As n , ( X X ) 1 convergestoapositivedefinitematrix(Xisassumedtobefullrank)and

1
( X u ) convergesto(kx1)vectorofzerosbecauseXisassumedtobeexogenous,
n
E (ui | X i 2 ,..., X ik ) = 0, uncorrelatedwithu.[Note X i1 = 1 ,interceptterm].

ui

1
1 X i1ui
.
Note X u =

.
n
n

X ik ui

X X X y = 0

( X y X X ) = 0

X ( y X ) = 0

i.e., X u = 0 ,whichimposes(k1)restrictionsontheLSestimatorandthed.f.becomesnk.

ui 0

X i 2ui 0

=
X u =

.
.

X ik ui 0

(Iv)
ThisisaclassicexampleofbiasduetoerrorsintheXvariable.
Write C t = 0 + 1Yt + ut andweexpect 0 = 0, 1 = k .

1 =

(C t C )(Yt Y )
=
2


(
Y
Y
)

(C

[(C

C ) + (vt v )][(Yt Y ) + ( wt w)]

[(Y Y ) + (w w)]

(Y + w Y w)
t

+ vt C v )(Yt + wt Y w)

[(Yt Y )(Ct C ) + ...)

(Y Y ) + (w w) + ...]
[(Y Y )(k (Y Y )) + ...)
=
(Y Y ) + (w w) + ...
2

Note:Idroppedthetermsthataregoingtodropwhenwetakeplim.Youcanexpandthewhole
expressionandgetplimtoseewhathappens.

p lim 1 =

p lim

1
k (Yt Y ) 2 + 0)
T

y2
=k 2
<k
2
1
+

2
2
y
w
p lim [ (Yt Y ) + ( wt w) + 0]
n

MPCisunderestimatedbecauseoftheerrorsintheRHSvariableY.Noticethattheerrorsinthe
dependentvariabledonotcausethisproblem.

0 = C 1Y = 0 + 1Y + u 1Y = 0 + ( 1 1 )Y + u

k y2

p lim 0 = 0 + ( 1 2
) > 0 .
y + w2 y

2.
Crosssectionprodfunction
(i)OLS

Dependent Variable: LQ
Method: Least Squares
Date: 09/19/13 Time: 08:49
Sample: 1 154
Included observations: 154
Variable

Coefficient

Std. Error

t-Statistic

Prob.

LK
LL
C

0.433597
0.727461
1.365120

0.050032
0.064365
0.324937

8.666394
11.30214
4.201183

0.0000
0.0000
0.0000

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)

0.879102
0.877501
0.536990
43.54203
-121.2481
548.9941
0.000000

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat

11.28342
1.534261
1.613612
1.672774
1.637643
1.851197

PlotresidualsagainstpredictedLQ(LQF)
2.8
2.4
2.0
1.6
RESID

1.2
0.8
0.4
0.0
-0.4
-0.8
-1.2
7

10

11

12

13

14

LQF

15

Seemsheteroskedastic.
Whitetest
Heteroskedasticity Test: White
F-statistic
Obs*R-squared

0.177840
0.919723

Prob. F(5,148)
Prob. Chi-Square(5)

0.9705
0.9688

Scaled explained SS

3.846983

Prob. Chi-Square(5)

0.5717

Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 09/19/13 Time: 09:14
Sample: 1 154
Included observations: 154
Variable

Coefficient

Std. Error

t-Statistic

Prob.

C
LK
LK^2
LK*LL
LL
LL^2

1.631187
-0.370713
0.027268
-0.032126
0.184230
0.011844

2.710430
0.544725
0.054786
0.160828
0.792864
0.120218

0.601818
-0.680550
0.497707
-0.199752
0.232361
0.098517

0.5482
0.4972
0.6194
0.8419
0.8166
0.9217

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)

0.005972
-0.027610
0.848217
106.4820
-190.1053
0.177840
0.970548

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat

0.282740
0.836745
2.546822
2.665145
2.594885
2.068046

Noevidenceofheteroskedasticity.
(ii)IfheteroskedasticyispresentwemayuseOLSwithrobuststderrors.AlternativelywecantryWLS
estimates.
(iii)Laborelasticityislargerthancapitalelasticity.(Thisisabitatoddswithlowlaborshareweobserve
forthewholeSingaporeeconomy.)
(iv)Testforconstantreturnstoscale
Wald Test:
Equation: Untitled
Test Statistic
t-statistic
F-statistic
Chi-square

Value

df

Probability

4.340346
18.83860
18.83860

151
(1, 151)
1

0.0000
0.0000
0.0000

Value

Std. Err.

0.161058

0.037107

Null Hypothesis: C(1)+C(2)=1

Null Hypothesis Summary:
Normalized Restriction (= 0)
-1 + C(1) + C(2)

Restrictions are linear in coefficients.

Rejectthenull.Sumofthecoeffsuggestsincreasingreturnstoscale.

TSdata
(v)
Dependent Variable: LQ
Method: Least Squares
Date: 09/19/13 Time: 09:47
Sample: 1978Q1 2000Q4
Included observations: 92
Variable

Coefficient

Std. Error

t-Statistic

Prob.

LK
LL
C

0.484583
0.882322
-1.588627

0.056443
0.211939
0.794846

8.585349
4.163095
-1.998659

0.0000
0.0001
0.0487

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)

0.908420
0.906363
0.147226
1.929130
47.23474
441.4166
0.000000

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat

8.292628
0.481128
-0.961625
-0.879393
-0.928435
0.052946

Nowthelaborelasticityisevenlarger.DWisverylow.Thereisserialcorrelation.Sothestderrorsare
notreliable.
(vi)
Dependent Variable: RESIDUAL
Method: Least Squares
Date: 09/19/13 Time: 09:50
Sample (adjusted): 1978Q2 2000Q4
Included observations: 91 after adjustments
Variable

Coefficient

Std. Error

t-Statistic

Prob.

RESIDUAL(-1)

0.960859

0.024462

39.27983

0.0000

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat

0.944841
0.944841
0.033219
0.099315
181.2011
1.201250

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.

Autocorrelationcoefficientisnear1,aunitrootissue.

-0.003920
0.141441
-3.960463
-3.932871
-3.949332

(vii)Clearlythereisanomittedvariableproblemhere.Technologyisthekeyomittedvariable.The
dependentvariableisvalueadded.Therefore,rawmaterialinputsareirrelevant.
(viii)
Dependent Variable: LQ
Method: Least Squares
Date: 09/19/13 Time: 09:52
Sample: 1978Q1 2000Q4
Included observations: 92
Variable

Coefficient

Std. Error

t-Statistic

Prob.

LK
LL
TREND
C

-0.332425
0.659902
0.021819
6.571413

0.041556
0.081190
0.000950
0.466574

-7.999368
8.127878
22.96136
14.08440

0.0000
0.0000
0.0000
0.0000

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)

0.986901
0.986454
0.055997
0.275938
136.6886
2209.974
0.000000

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat

8.292628
0.481128
-2.884535
-2.774892
-2.840282
0.243047

Notagoodregression.Capitalelasticitybecomenegative,notacceptable.DWisstilllow.
(ix)
Dependent Variable: RR=residuals
Method: Least Squares
Date: 09/19/13 Time: 11:58
Sample (adjusted): 1978Q2 2000Q4
Included observations: 91 after adjustments
Variable

Coefficient

Std. Error

t-Statistic

Prob.

RR(-1)

0.885582

0.051515

17.19089

0.0000

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
Durbin-Watson stat

0.766520
0.766520
0.026575
0.063559
201.5090
1.564922

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.

0.000657
0.054997
-4.406791
-4.379199
-4.395659

StilltheARcoefficientiscloseto1.Thiscouldstillbeaunitrootissue.
(x)
The above regression is:

LQt = 0 + 1 LK t + 2 LLt + 3t + ut
This in first differences yield

LQt = 1LK t + 2 LLt + 3 + ut

Note that the trend coefficient now becomes the intercept term. It should provide an estimate of technology effect.

Dependent Variable: DLQ

Method: Least Squares
Date: 09/19/13 Time: 09:56
Sample (adjusted): 1978Q2 2000Q4
Included observations: 91 after adjustments
Variable

Coefficient

Std. Error

t-Statistic

Prob.

DLK
DLL
C

-0.056943
0.620159
0.016159

0.070078
0.161923
0.003347

-0.812566
3.829962
4.827949

0.4187
0.0002
0.0000

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)

0.142874
0.123394
0.025366
0.056623
206.7668
7.334369
0.001132

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat

0.018816
0.027093
-4.478392
-4.395616
-4.444997
1.418882

DWisbetter.ButDLKisnegativeandinsignificant.Thisiscounterintuitive.Theregressionneedsfurther
refinements.