Week 11 Introductory Econometrics

October 14, 2014

Week 11 Introductory Econometrics

October 14, 2014

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Assignment 2 (Q2 part e)

The advertising expenditure is optimal when tr

a = 1
From (a) and at p = 1 and a = 40
tr
a = 3 + 25 ai + 6 pi = 3 + 25 (40) + 6 (1)
tr
a = 3 + 805 + 6 (1) = 1 and test it using F-test
H0 : 3 + 805 + 6 (1) = 1
H1 : 3 + 805 + 6 (1) 6= 1
Follow the usual procedure of F-test.

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Assignment 2 (Q2 part f)

At ai = 40 and pi = 2, the claim is:

E (trt ) = 1 + 22 + 403 + 44 + 16005 + 806 = 175
H0 : 1 + 22 + 403 + 44 + 16005 + 806 = 175
H1 : 1 + 22 + 403 + 44 + 16005 + 806 6= 175
Follow the usual procedure of F-test.

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Assignment 2 (Q3 part b)

An estimate of price dierence is:

[ age=2 price
[ age=10 = b3 (2) b3 (10) = 90.672
price

Holding other variable constants, on average price of a 2 year old house is

90.67 dollars more than the price of a 10 year old house
A 95% interval is given by:



[ age=2 price
[ age=10 t(0.975,1495) se (8b3 )
price

90.672 1.962 (8) (80.502) = (1173, 1354)

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Question 1a (br2.wf1)

In this question, we concern with the selling price (PRICE), the size of the
house in hundreds square feet (SQFT100) and the age of the house in years
(AGE). Dene SQFT100=SQFT/100.

log (Price)
= 11.12 + 0.038 sqft 100 0.0176 age + 0.0002 age 2

0.71

(SE ) (0.027)

(0.0009)

(0.0014)

Week 11 Introductory Econometrics

(0.00002)

R2 =

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Question 1b

Plot the residuals against all regressors. Is there any evidence of

heteroskedasticity?

The absolute magnitude of the residuals increases as age increases,

suggesting heteroskedasticity, with the variance dependent on the age of the
house. Conversely, the absolute magnitude of the residuals appears to
decrease as SQFT increases. The variance might decrease as the house size
increases, but we cannot be certain.
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Question 1c (White test)

After you estimate the model: log(price) c sqft100 age age^2

Click view -> residual diagnostics -> heteroskedasticity test -> choose
WHITE

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Question 1c (White Test)

H 0 : 2 = 3 = 4 = 5 = 6 = 7 = 8 = 9 = 0 (no heteroskedasticity)
H1 : at least one of i 6= 0, i = 2, 3, ..., 9 (heteroskedasticity is present)

Test statistics 2 = N R 2 = 1080 0.164 = 177.50 with p-value =

0.0000<0.01. (Note: the R 2 comes from the regression of ei2 on SQFT 100,

2
SQFT 1002 ,..., AGE 2 .
We reject H 0 conclude that heteroskedasticity exists.

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Question 1d)

Given that heteroskedasticity exists, then we can correct for

heteroskedasticity by using heteroskedasticity robust standard errors.

log (Price)
= 11.12 + 0.038 sqft 100 0.0176age + 0.0002 age 2
(SE ) (0.032)

(0.0012)

(0.0018)

(0.00004)

R2 =

0.71
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GLS Steps

Week 11 Introductory Econometrics

October 14, 2014

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Question (1e)

Estimate the variance function: i2 = exp (1 + 2 zi 2 + 3 zi 3 ), where

z2 = (SQFT 100) and z3 = (age)

.


2 = + z + z , and use log e2 to
Rewrite the equation:
log

1
2
i
2
3
i
3
i
i


approximate log i2 .

We can conclude that age has signicant eect on variance while SQFT100 is
not signicant. This conclusion agrees with our speculation from inspecting
the gures in part (b), although in part (b) we did suggest the sign of
SQFT100 might be negative
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Question (1f) (GLS)

Estimate i2 = exp ( 1 + 2 zi 2 + 3 zi 3 ), in eviews: sighatf2 = exp(c(1) +

c(2)*(sqft100) + c(3)*(age))
p
Estimate i = i2 , in eviews: sighatf = @sqrt(sighatf2)
Generate w = 1/sighatf
Estimate log(price)*w w sqft100*w age*w (age^2)*w

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Question (1f) GLS

log (Price)
= 11.10 + 0.038 sqft 100 0.0153age + 0.0001 age 2
(SE ) (0.025)

(0.0008)

(0.0013)

Week 11 Introductory Econometrics

(0.00002)

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Question (1G)

Three dierent specications: original regression, White HC standard errors,

GLS

log (Price)
= 11.12 + 0.038 sqft 100 0.0176 age + 0.0002 age 2
R2 =
(SE ) (0.027)

(0.0009)

(0.0014)

(0.00002)

0.71(original regressions)

log (Price)
= 11.12 + 0.038 sqft 100 0.0176age + 0.0002 age 2
(SE ) (0.032)

(0.0012)

(0.0018)

(0.00004)

R2 =

0.71

log (Price)
= 11.10 + 0.038 sqft 100 0.0153age + 0.0001 age 2 (GLS)
(SE ) (0.025)

(0.0008)

(0.0013)

(0.00002)

The HC standard errors are higher than conventional standard errors for both
least squares and GLS, and for all coecients. The conventional GLS
standard errors are smaller than the least squares HC standard errors,
suggesting that GLS has improved the eciency of the estimation.

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Question 1h

Are the residuals from your GLS estimation homoskedastic? Test for this.
Use White test

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Question (1h)

H 0 : 2 = 3 = 4 = 5 = 6 = 7 = 8 = 9 = 10 = 0 (no
heteroskedasticity)
H1 : at least one of i 6= 0, i = 2, 3, ..., 10 (heteroskedasticity is present)
Test statistics 2 = N R 2 = 1080 0.092 = 99.65 with p-value =
0.0000<0.05
We reject H 0 conclude that heteroskedasticity still exists. The variance
function that we used does not appear to have been adequate to eliminate
the heteroskedasticity.

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