Chapter 03 - Simple Regression

Applied Econometrics
Second edition
Dimitrios Asteriou and Stephen
G. Hall
Applied
Econometrics
SIMPLE REGRESSION
1. Introduction to the Classical Linear Regression

Model
2. The OLS Method of Estimation
3. The Overall Goodness of Fit
4. Hypothesis Testing
5. How to Estimate a Simple Regression in
Eviews
6. Applications and Examples
Learning Objectives
• Compute the equation of a simple regression line from a
sample of data, and interpret the slope and intercept of
the equation.
• A full understanding of the simple OLS method of
estimation and discussion of the properties of estimated
coefficients.
• Computation of a standard error of the estimate and
interpretation of its meaning and its use in Hypothesis
Testing.
• Understanding and interpretation of the R2
Introduction
• Regression analysis is the process of constructing a
mathematical model or function that can be used to
predict or determine one variable by another variable.
• Key issue here is direction of causation of the two
variables, or which variable depends on the other.
• Therefore we have two cases of variables
dependent variables (usually denoted by Y)
independent or explanatory (usually denoted by X)
The Scatter Plot
X
300
250
200
X
150
100
50
0
60 80 100 120 140 160 180
Four Ways of Fitting a Line in the Data
• By eye
• Connecting the first with the last observation
• Take the average of the first two and the
average of the two last and connect
• Apply Ordinary Least Squares
Regression Models
 Deterministic Regression Model:
Y=0+1X
 Probabilistic Regression Model:
Y=0+1X+u
 0 and 1 are population parameters
 0 and 1 are estimated by sample

statistics b0 and b1
Equation of the Regression Line
Yˆ  b0  b1 X
where : b0 = the sample intercept
b1 = the sample slope
Yˆ = the predicted value of Y
Slope and Intercept of the
Regression Line
 X  Y 
  X  X Y  Y   XY  nXY  XY 
n
b  
 X  X   X n X X
1 2 2 2 2

X 2

n
 Y  X
b Y b X  n b n
0 1 1
Least Squares Analysis
SSXY    X  X Y  Y    XY 
 X  Y 
n
X
2
X  X  
2
SSXX    X
2

n
SSXY
b1  SSXX
 Y  X
b  Y b X  n b n
0 1 1
Example: The Keynesian
Consumption Function
Example: The Keynesian
Consumption Function
C2=B2*A2
D2=B2*B2
A22=SUM(A2:A21)
B22=SUM(B2:B21)
and so on!
Applied
ExcelEconometrics
Calculations
b0=(C22-(A22*B22)/20)/(D22-((B22ˆ2)/20))=0.601888903
b1=AVERAGE(A2:A21)-G2*AVERAGE(B2:B21)=15.116408
Excel Calculations (the easy way!)
• Step 1: go to the menu Tools/Data Analysis and choose the command
regression.
• Step 2: We are then asked to specify the Input Range, Output Range,
and a choice of including or not labels in the first row.
• Step 3: The Input Range is the columns that contain the data for Y and X
(i.e. we enter ‘$A$1:$B$21’ or simply select this area using the mouse).
• Step 4: The Output Range can be either a different sheet (not
recommended) or any empty cell in the current sheet (i.e. we might specify
cell F5).
• Step 5: Since we have chosen the labels in our selection we tick the box.
• Step 6: By clicking <OK> we obtain the display shown in Table 4.4.
Excel Results
Applied Econometrics: A Modern 15

Approach using Eviews and
The Regression Line

300
X
250
200
X
150
Linear (X)
100
50
0
60 80 100 120 140 160 180
The Coefficient of Determination

The proportion of variability of the dependent
variable accounted for or explained by the
independent variable in a regression model.
It is called R2 and it takes values from 0-1.
17
Hypothesis Tests for the Slope
of the Regression Model
b 
H 0:  1  0 t
1 1
S
H 1:  1  0
b
S
where: S b

SSXX
e
H 0:  1  0 SSE
Se 
H 1:  1  0
n2
SSXX  
 X
2
X
2

H 0:  1  0 n
  the hypothesized slope
H 1:  1  0 1
df  n  2
Regression in Eviews (1) (1)

Step 1 Open EViews.
Step 2 Choose File/New/Workfile in order to create a new file.
Step 3 Choose Undated or Irregular and specify the number of

observations (in this case 20). A new window appears which
automatically contains a constant (c) and a residual (resid) series.
Regression in EViews (2)

Step 4 In the command line type:
genr x=0 (press enter)
genr y=0 (press enter)
which creates two new series named x and y that contain zeros
for every observation.
Open x and y as a group by selecting them and double clicking
with the mouse.
Step 5 Either type the data in EViews or copy/paste the data

from Excel®. To edit the series press the edit +/− button. After
finishing with editing the series press the edit +/− button again
to lock or secure the data.

Chapter 03 - Simple Regression

Uploaded by

Copyright:

Available Formats

Chapter 03 - Simple Regression

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 03 - Simple Regression

Uploaded by

Copyright:

Available Formats

Applied Econometrics

1. Introduction to the Classical Linear Regression

The Scatter Plot

Four Ways of Fitting a Line in the Data

 0 and 1 are estimated by sample

Least Squares Analysis

Applied Econometrics: A Modern 15

The Regression Line

The Coefficient of Determination

It is called R2 and it takes values from 0-1.

Regression in Eviews (1) (1)

Step 2 Choose File/New/Workfile in order to create a new file.

Step 3 Choose Undated or Irregular and specify the number of

Regression in EViews (2)

Step 5 Either type the data in EViews or copy/paste the data

You might also like