Applied Econometrics
Applied Econometrics
Second edition
Dimitrios Asteriou and Stephen G. Hall
Applied Econometrics
INTRODUCTION
1. What is Econometrics?
2. The Stages of Econometric Work
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Applied Econometrics
What is Econometrics?
Econometrics means measurement (metrics in
greek) in economics.
The importance of applied work in economics is
increasing constantly.
Theory suggests that X affects Y but is this true
or not?
This is the work of the applied econometrician.
Applied Econometrics
What is Econometrics?
• Examples of problems that may be
tackled by an Econometrician
(a)Modelling long-term relationships among
prices and interest rates.
(b)Examining the effect of inflation in
unemployment rates
(c) Examining the effect of disposable
income on consumption
Applied Econometrics
What is Econometrics?
• Examples of problems that may be
tackled by an Econometrician
(continued)
(a) Determining the factors that affect GDP
per capita growth
(b) Testing the validity of the CAPM and APT
theories
(c) Forecasting the correlation among the
returns and the stock indices of two
countries.
Applied Econometrics
The Stages of Applied
Econometric Analysis
Economic Theory
Econometric Model
Data
Model Estimation
Specification Testing and Diagnostics
Is the Model Adequate?
No
Yes
Test any hypothesis
Use for Predictions and Policy Making
Applied Econometrics
The Structure of Economic Data
• There are three different types of economic
data
• TIME SERIES
• CROSS SECTIONAL
• PANEL DATA
Applied Econometrics
The Structure of Economic Data
• Time Series Data
• Examples: GDP, Unemployment, Inflation,
Stock Prices, etc
• Vectors or Columns (like in a spreadsheet)
• Frequencies: Yearly, Bi-annually, Quarterly,
Monthly, Weekly, Daily, Hourly.
• Lots of different values for different time
periods for one country, state, city, market.
Applied Econometrics
The Structure of Economic Data
• Cross-Sectional Data
• Examples: GDP, Unemployment, Inflation,
Stock Prices, etc.
• Vectors or Rows (like in a spreadsheet)
• Frequencies: Yearly, Bi-annually, Quarterly,
Monthly, Weekly, Daily, Hourly.
• Lots of different values for different countries,
states, cities, markets, but for one time period
only.
Applied Econometrics
The Structure of Economic Data
• Panel Data
• A combination of time series and cross-sectional data.
• Examples: GDP, Unemployment, Inflation, Stock Prices,
etc.
• Matrices (columns and rows to make an n times m matrix)
• Frequencies: Yearly, Bi-annually, Quarterly, Monthly,
Weekly, Daily, Hourly.
• Lots of different values for different countries, states, cities,
markets, and for different time periods.
Applied Econometrics
The Structure of Economic
Data - Notation
• Time series: Yt, t=1990, 1991, …, 2012
• Cross-Sectional: Yi, i=1, 2, 3, …, 40
• Panel Data: Yit, i and t defined as above.
• It is common to denote each observation by the
letter t and the total number of observations by
T for time series data, and to denote each
observation by the letter i and the total number
of observations by N for cross-sectional data.
The Structure of Economic
Applied
Econometrics
Data – Quantitative vs Qualitative
• The data may be quantitative and qualitative.
• Quantitative (e.g. GDP per capita, exchange
rates, stock prices, unemployment rates)
• Qualitative (e.g. Day of the week, gender,
level of education)
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