FIN822 Li1 Welcome to Econometrics

FIN822 Li2 Why study Econometrics? An empirical analysis uses data to test a theory or to estimate a relationship A formal economic model can be tested

FIN822 Li3 Types of Data Cross-sectional data is a random sample Each observation is a new individual, firm, etc. with information at the same point in time Time series data has a separate observation for each time period – e.g. daily stock prices of IBM over year 2005.

FIN822 Li4 Types of Data – Panel If we pool cross sections and time series data together.

FIN822 Li5 To describe a single variable, We may draw a histogram to see its disributions. For time series variable, we can also plot a time-series plot.

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8 To describe relationship between variables Scatter plot Correlations, Regressions

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10 The Question of Causality Simply establishing a relationship between variables does not necessarily imply causality. Can be difficult to establish causality. Example, a person’ height and sister’s height are positively correlated, but none is causing the other. Sometimes we do not care, so long as it is useful in forecasting. (example, dating)

FIN822 Li11 Advanced topics To test whether a single variable follows some specific distribution, we can do a Q-Q plot against that distribution. To test relationship between two variables 1. Pearson correlation (the ordinary correlation you are already familiar with) 2. Spearman correlation (also called rank correlation)

If a Q-Q plot looks like a straight line, then your variable may follow that distribution. FIN822 Li12

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