Examiners commentaries 2010

Examiners commentaries 2010

20 Elements of econometrics Format of the examination
This commentary reects the examination and assessment arrangements for this unit in the academic year 200910. In 2011 the format of the examination will change to:

Candidates should answer FOUR of the following SIX questions: QUESTION 1 of Section A (25 marks in total) and THREE questions from Section B (25 marks each). Candidates are strongly advised to divide their time accordingly. Candidates should note that Section B will now consist of ve questions rather than seven questions as previously.

The format and structure of the examination may change again in future years, and any such changes will be publicised on the virtual learning environment (VLE).

General remarks
Learning outcomes
At the end of this unit and having completed Essential readings and activities you should: have a solid understanding of ordinary least squares (OLS) regression methodology, a full understanding of the Gauss-Markov (GM) conditions and other assumptions required in the application of the classical regression model, the properties of the OLS estimator, eect of violation of GM conditions on the properties of the OLS estimators, test and remedy of violations of these conditions; have a good understanding of instrumental variables and simultaneous equations (problem of identication, simultaneous equation bias, two-stage least squares and application of Durbin-Wu-Hausman test); understand the principles underlying the use of maximum likelihood estimation; have an understanding of binary choice models (linear probability model, logit and probit), limited dependent variable models (tobit and sample selection bias); have an appreciation of the diculties that arise in the application of regression analysis to non-stationary time series, know how to test unit roots and know what is meant by cointegration.

Common mistakes committed by candidates

A large number of candidates were not able to distinguish between sample variance and covariance and population variance and covariance (this is happening year after year). They treat them as the same. This results in incorrect analysis and candidates lose signicant marks.

20 Elements of econometrics

Consider an example: Suppose data is deviation from respective sample means and the regression model is: yt = xt + ut , t = 1, 2, . . . , T. The ordinary least squares estimator of is:
T T

xt yt =
t=1 T

xt ut =+
t=1 T

. x2 t

x2 t
t=1 t=1

In terms of variances and covariances (a large number of candidates prefer this terminology) this can be written as: = + Cov (x, u)) . Var (x) Here Cov (x, u) and Var (x) are sample[Cov (x, u)] and sample[Var (x)].
T T

Candidates should realise that

t=1 T

ut ,
t=1 T

xt ut , Cov (x, u) and Var (x) given above are sample

moments and as such

t=1

ut = 0,
t=1

xt ut = 0 and Cov (x, u) = 0. But, if we take expectation, E [ut ] = 0,

then: by assumption. Then:

T T

E
t=1

xt ut =
t=1

xt [E (ut )] = 0,

as the xt are xed they can be taken out of expectation, and so: E [Cov (x, u)] = E 1 T
T

xt ut = 0,
t=1

) = , i.e. is an unbiased estimator or . as previously argued. This makes E ( To prove consistency take plim to get: T 1 xt ut T t=1 plim = + plim T 1 x2 t T t=1 plim =+ plim 1 T 1 T
T

xt ut
t=1 T

x2 t
t=1

=+ =+

plim (sampleCov (x, u)) plim (sampleVar (x)) populationCov (x, u) . populationVar (x)

= , i.e. By assumption population Cov (x, u) = 0 and population Var (x) > 0, hence plim is a consistent estimator of .

Examiners commentaries 2010

Remember that in general: plim ((sample variance)) = population variance, plim (sample covariance)) = population covariance. This concept has been used in many questions. This simple mistake of not distinguishing between sample variance and covariance and population variance and covariance results in signicant loss of marks which might result in loss of a degree class or even be a dierence between pass and fail. Candidates struggled to give competent answers to interpretation of empirical results. When interpreting an empirical result you should discuss signicance of the coecients, magnitude and sign of the coecients. Also, you should make sure that GM conditions hold. Just as last year, many candidates did not appear to read questions carefully enough and often omitted to give answers to parts of questions which ask for details of such things as the assumptions necessary for a particular result to be true.

Key steps to improvement

Essential reading for this unit includes the subject guide and
Dougherty, C. Introduction to econometrics. (Oxford: Oxford University Press, 2007) third edition [ISBN 9780199280964].

Apart from Essential readings you should also do some supplementary readings. Two very good books of the same level are:
Gujarati, Damodar N. Basic econometrics. (Boston; London: McGraw-Hill Education, 2009) fth edition [ISBN 9780071276252]. Wooldridge, Jerey M. Introductory econometrics. (Mason, Ohio: Thomson Learning, 2008) fourth edition [ISBN 9780324788907].

At the website URL http://econ.lse.ac.uk/ie are PowerPoint slideshows that provide graphical treatment of the topics covered in the text, data sets, statistical tables and a downloadable copy of the subject guide 20 Elements of Econometrics. Candidates should utilise data sets using standard regression programmes (STATA or EViews). This will help their understanding of the subject.

20 Elements of econometrics

Question spotting Many students are disappointed to nd that their examination performance is poorer than they expected. This can be due to a number of dierent reasons and the Examiners commentary suggests ways of addressing common problems and improving your performance. We want to draw your attention to one particular failing question spotting, that is, conning your examination preparation to a few question topics which have come up in past papers for the unit. This can have very serious consequences. We recognise that students may not cover all topics in the syllabus in the same depth, but you need to be aware that Examiners are free to set questions on any aspect of the syllabus. This means that you need to study enough of the syllabus to enable you to answer the required number of examination questions. The syllabus can be found in the Unit information sheet in the section of the VLE dedicated to this unit. You should read the syllabus very carefully and ensure that you cover sucient material in preparation for the examination. Examiners will vary the topics and questions from year to year and may well set questions that have not appeared in past papers every topic on the syllabus is a legitimate examination target. So although past papers can be helpful in revision, you cannot assume that topics or specic questions that have come up in past examinations will occur again. If you rely on a question spotting strategy, it is likely you will nd yourself in diculties when you sit the examination paper. We strongly advise you not to adopt this strategy.