1. 1 Financial Econometrics  A new branch of econometrics  An application of econometrics in the field of finance/financial economics  An indispensable tool for students specializing in the fields of finance, financial economics and economics of money and banking.

2. 2 Ch1: Introduction 1.What is econometrics? 2.Why a separate discipline? 3.Methodology of econometrics 4.What is financial econometrics? 5.Econometric software packages 6.Econometrics development in China 7. Microfit 4.0 demo

3. 3 1. What is econometrics Definition of econometrics: Literally interpreted, econometrics means “economic measurement”. The term “econometrics” first came into prominence with the formation in the early 1930s of Econometric society and the founding of the journal Econometrica.

4. 4 1.What is Econometrics  Samuelson(1954): Econometrics may be defined the application of mathematical statistics to economic data to lend empirical support to the models constructed by mathematical economics and to obtain a numerical estimates  Goldberger(1964): Econometrics may be defined as the social science in which the tools of economic theory, mathematics, and statistical inference are applied to the analysis of economic phenomena.  Johnston(1984): The basic task of econometrics is to put empirical flesh and blood on the theoretical structures.  In short, Econometrics is an amalgam of economic theory, mathematical economics, economic statistics, and mathematical statistics.

5. 5 2.Why a separate discipline  Econometrics vs. economic theory  Econometrics vs. mathematical economics  Econometrics vs. economic statistics  Econometrics vs. mathematical econometrics  http://www.almaz.com/nobel/

6. 6 3.Methodology of econometrics  Statement of theory or hypothesis  Specification of the econometric model of the theory  Obtaining the data  Estimation of the parameters of the econometric model  Hypothesis testing  Forecasting or prediction  Using the model for control or policy purposes

7. 7 4.What is financial econometrics  Definition: It is the application of econometrics in the fields of finance, financial economics and economics of money and banking.  An example: The demand for money function

8. 8 Demand for Money  Gregory Chow(1966) where M = natural logarithm of total money stock Yp = natural logarithm of permanent income Y = natural logarithm of current income R = natural logarithm of rate of interest  Taylor and Newhouse(1969)

9. 9 5.Econometric software packages  A brief introduction to econometric software packages http://www.statforum.com/  An introduction to Microfit and Eviews Microfit demo Eviews demo

10. 10 6.Econometrics in China  Econometrics development in China 1980 Beijing American Prof. Lawrence Klein (1980)Lawrence Klein 1998  Financial econometrics in China

11. 11 7.Microfit 4.0 demo  Introduction  An example: Discouraged-worker hypothesis vs. Added- worker hypothesis  Discouraged-worker hypothesis: When economic conditions worsen, as reflected in a higher unemployment rate, many unemployed workers give up hope of finding a job and drop out of the labour force.

12. 12 7. Microfit 4.0 demo Added-worker hypothesis: When economic conditions worsen, many secondary workers who are not currently in the labour market may decide to join the labour force if the main breadwinner in the family loses his or her job. Even if the jobs those secondary workers get are lowly paid, the earnings will make up some of the loss in income suffered by the primary breadwinner. In this demonstration, we examine the relationship between the dependant variable, U.S. Civilian Labour Force Participation Rate (CLFPR, %) and the independent variables, Civilian Unemployment Rate (CUNR, %) and Real Average Hourly Earnings (AHE82, 1982 $).

13. 13 7. Microfit demo  Scatter diagram  Linear regression model