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William Greene

Department of Economics

Stern School of Business

Applied Econometrics

1. The Paradigm of Econometrics

Econometrics: Paradigm

Theoretical foundations

Microeconometrics and macroeconometrics

Behavioral modeling: Optimization, labor

supply, demand equations, etc.

Statistical foundations

Mathematical Elements

Model building the econometric model

Mathematical elements

The underlying truth is there one?

What is bias in model estimation?

Why Use This Framework?

Understanding covariation

Understanding the relationship:

Estimation of quantities of interest such as

elasticities

Prediction of the outcome of interest

Controlling future outcomes using knowledge of

relationships

Measurement as Observation

Population Measurement

Theory

Characteristics

Behavior Patterns

Choices

Inference

Population Measurement

Econometrics

Characteristics

Behavior Patterns

Choices

Model Building in Econometrics

Role of the assumptions

Sharpness of inferences

Parameterizing the model

Nonparametric analysis

Semiparametric analysis

Parametric analysis

Application: Is there a relationship between

investment and capital stock? (10 firms, 20

years)

Nonparametric Regression

Nonparametric Regression of Investment on Capital Stock

KC

5 0 0

1 0 0 0

1 5 0 0

2 0 0 0

0

5 0 0 1 0 0 0 1 5 0 0 2 0 0 0 2 5 0 0 0

I

n

v

s

t

m

n

t

What are the assumptions?

What are the conclusions?

E

E

(

=

(

=

= A A

A =

+

N

i=1 i i

N

i=1 i

i

0.2

Kernel Regression

w (z)y

F(z)=

w (z)

x -z 1

( ) K

.9 / N

(t) (t)[1 (t)]

exp(t)

(t)

1 exp(t)

i

w z

s

K

Semiparametric Regression

Investment

i,t

= a + b*Capital

i,t

+ u

i,t

Median[u

i,t

| Capital

i,t

] = 0

Least Absolute Deviations Regression of I on C

C

3 2 0

6 4 0

9 6 0

1 2 8 0

1 6 0 0

0

5 0 0 1 0 0 0 1 5 0 0 2 0 0 0 2 5 0 0 0

I I L AD

I

n

v

s

t

m

n

t

=

N

a,b i i

i 1

Least Absolute Deviations

F(x)=a+bx

a,b=ArgMin |y a-bx |

Parametric Regression

Investment

i,t

= a + b*Capital

i,t

+ u

i,t

u

i,t

| Capital

j,s

~ N[0,o

2

] for all i,j,s,t

Least Squares Regression of Investment on Capital

C

3 2 0

6 4 0

9 6 0

1 2 8 0

1 6 0 0

0

5 0 0 1 0 0 0 1 5 0 0 2 0 0 0 2 5 0 0 0

Re g re s s i o n l i n e i s I = 1 4 . 2 3 6 2 1 + . 4 7 7 2 2 C

I

n

v

s

t

m

n

t

=

(

'

(

| | | | | |

(

( | | |

(

\ . \ . \ .

N

2

a,b i i

i 1

1

N N

i=1 i=1

i i i

Least Squares Regression

F(x)=a+bx

a,b=ArgMin (y a-bx )

1 1 1

= y

x x x

i

Estimation Platforms

The best use of a body of data

The accretion of knowledge

Model based

Kernels and smoothing methods (nonparametric)

Moments and quantiles (semiparametric)

Likelihood and M- estimators (parametric)

Methodology based (?)

Classical parametric and semiparametric

Bayesian strongly parametric

Classical Inference

Population Measurement

Econometrics

Characteristics

Behavior Patterns

Choices

Imprecise inference about

the entire population

sampling theory and

asymptotics

Bayesian Inference

Population Measurement

Econometrics

Characteristics

Behavior Patterns

Choices

Sharp, exact inference about

only the sample the posterior

density.

Empirical Research

Iterative search for information about the

structure

Specification searches

Stepwise modeling, data mining, etc.

Leamer on specification searching and significance

levels

Judge, et al. on sequential inference and pretesting

Hendry on the encompassing principle general to

specific

Classical estimation and inference

Data Structures

Observation mechanisms

Passive, nonexperimental

Active, experimental

The natural experiment

Data types

Cross section

Pure time series

Panel longitudinal data

Financial data

Econometric Models

Linear; static and dynamic

Discrete choice

Censoring and truncation

Structural models and demand systems

Estimation Methods and Applications

Least squares etc. OLS, GLS, LAD, quantile

Maximum likelihood

Formal ML

Maximum simulated likelihood

Robust and M- estimation

Instrumental variables and GMM

Bayesian estimation Markov Chain Monte

Carlo methods

Trends in Econometrics

Small structural models vs. large scale multiple equation

models

Parametric vs. non- and semiparametric methods

Robust methods GMM (paradigm shift?)

Unit roots, cointegration and macroeconometrics

Nonlinear modeling and the role of software

Behavioral and structural modeling vs. covariance

analysis pervasiveness of the econometrics paradigm

Course Objective

Develop the tools needed to read

about with understanding and to

do empirical research in

economics using the current

body of techniques.

Prerequisites

A previous course that used regression

Mathematical statistics

Matrix algebra

We will do some proofs and derivations

We will also examine empirical applications

The Course Outline

Topics

Sequence

Timing

No class on: Tuesday September 30

Thursday, October 9

Thursday, November 27

Readings

Main text: Greene, W., Econometric Analysis,

6

th

Edition, Prentice Hall, 2008.

A few articles

Notes on the course website:

http://www.stern.nyu.edu/~wgreene/Econometrics

/Econometrics.htm

Course Applications

Software

LIMDEP/NLOGIT provided, supported

SAS, Stata optional, your choice

Gauss, Matlab, others

Lab sessions: Fridays? To be determined

Problem sets

Software

Questions and review as requested

Term Paper Application (more details later)

Course Requirements

Problem sets: approximately 6 (15%)

Midterm, in class (30%)

Final exam (40%)

Term paper/project: Application of method(s)

developed in class to a live data set. (15%)

Enthusiasm

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