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ECON6300/7320
Course Information ▶ The course will focus on estimation and inference methods that are widely used in applied microeconomics. ▶ The course has a topics-based structure, and theory and applications are closely integrated. ▶ Whenever you learn a method theoretically (lecture), there will be an R exercise with data for the method (practical) ▶ The course will provide econometric skills that could be used in quantitative research at the Graduate level. 3 / 54 Course Meetings: Lectures and Tutorials ▶ Lectures ▶ Go through theory, illustrating examples, perhaps some proofs, and Q& A ▶ Tutorials ▶ See the Course Timetable posted on Blackboard for the time and location. ▶ Focus is on practical implementation in R ▶ Start from week 2 (Introduction to R programming) 4 / 54 Assessment ▶ Two assignments + Final problem set. ▶ Analytical and empirical problems. ▶ Assignments 1-2 each cover 1/3 topics of the course (30% each). ▶ Final problem set is comprehensive and covers the entire course (40%). 5 / 54 Learning Resources ▶ Recommended Textbooks: ▶ Hansen, E.B. (2022). Econometrics. Princeton University Press. (H) ▶ Cameron, A.C., and P.K. Trivedi (2005). Microeconometrics: Methods and Applications. Cambridge University Press. (CT) ▶ There are many other useful texts, e.g., Greene, Wooldridge, etc. See ECP. ▶ As the semester progresses, lecture notes, slides, datasets, problem sets, etc. will be provided. It is however strongly encouraged that you read the relevant part of the textbook and other references. 6 / 54 This week: math review ▶ You are EXPECTED to have a basic grasp of mathematics/statistics. If most of the concepts we cover today are unfamiliar to you, this course may be unsuitable (unless it is compulsory (!!!)). ▶ Random Variables, Expectation, Variance, Covariance ▶ Point Estimation, Hypothesis Testing, Interval Estimation ▶ Linear Algebra: vector and matrix and their operations 7 / 54 Math Review random variable ▶ Informally, a Random Variable (RV) takes on numerical values determined by an experiment. ▶ Example: Consider an experiment in which a fair coin is tossed. Then, the possible outcomes are Head and Tail, i.e., {H,T}. Then, we define a random variable X as follows; X = { 0 if the outcome is T 1 if the outcome is H The X could be either 0 or 1 whenever the coin is tossed. Each time, the realisation of X would be different. The uncertainty can be summarised as Pr(X = 0) = 0.5. 8 / 54 Math Review probability functions ▶ The uncertainty of a random variable, say X , is represented by its cumulative distribution function (CDF), defined as FX (x) := Pr(X ≤ x) ▶ When FX (x) is a continuous function, X is said to be a continuous random variable. For a continuous random variable, the probability density function (PDF), denoted by fX (x), is a function that satisfies Pr(a < X < b)︸ ︷︷ ︸ =FX (b)−FX (a) = ∫ b a fX (t)dt ▶ If FX (x) is differentiable, we have fX (x) = d dx FX (x) ▶ If FX (x) is a step function, X is discrete, which we do not cover today. 9 / 54 Math Review expectation ▶ A function of a random variable is also a random variable. For example, exp(X ), log(X ), etc. More generally, g(X ) with some function g(·). ▶ Suppose X have the PDF fX (x). The expectation of g(X ) is E [g(X )] := ∫ ∞ −∞ g(t) · fX (t)dt which represents the central tendency of the random variable, g(X ). ▶ As a special case with g(X ) = X , E [X ] := ∫ ∞ −∞ t · fX (t)dt which is the expectation of X , or the expected value or the mean ▶ Consider another case with g(X ) = (X − E [X ])2. V (X ) := E [(X − E [X ])2] which is called the variance that represents the variability of X . Note that √ V (X ) is the standard deviation of X . 10 / 54 Math Review expectation ▶ E [X ] and V (X ) are the population parameters, or theoretical moments. You need to know the distribution to compute E [X ] and V (X ). ▶ E [X ] must be distinguished from the sample mean (average). For example, when you observe some numbers x1, . . . , xn, its average is xn := 1 n n∑ i=1 xi which is NOT the expectation of the distribution ▶ Similarly, you must distinguish V (X ) and the sample variance 1 n n∑ i=1 (xi − xn)2 11 / 54 Math Review expectation 1. E [c] = c, for any constant c 2. E [aX + b] = aE [X ] + b for any constants a and b 3. a1, . . . , an are constants, and X1, . . . ,Xn are RV’s. Then, E [ n∑ i=1 aiXi ] = ∑ i=1 aiE [Xi ]. As a special case, we have E [ n∑ i=1 Xi ] = ∑ i=1 E [Xi ]. 4. V (c) = 0, for any constant c. 5. V (aX + b) = a2Var(X ) for any constants a and c. 12 / 54 Math Review joint distribution ▶ Suppose X and Y are jointly distributed with the joint PDF fXY (x , y). ▶ The marginal PDF of X can be obtained by integrating Y out, fX (x) = ∫ ∞ −∞ fXY (x , y)dy ▶ X and Y are independent if and only if for all x and y fXY (x , y) = fX (x)fY (y) ▶ The expectation of g(X ,Y ) for some function g(X ,Y ) is E [g(X ,Y )] = ∫ ∞ −∞ ∫ ∞ −∞ g(x , y)fXY (x , y)dxdy 13 / 54 Math Review covariance ▶ If g(X ,Y ) = (X − E [X ])(Y − E [Y ]), then we have the covariance, C(X ,Y ) = E [(X − E [X ])(Y − E [Y ])] ▶ If C(X ,Y ) > 0, the X and Y move in the same direction. If C(X ,Y ) < 0, they move in the opposite direction. ▶ |C(X ,Y )| ≤√V (X )√V (Y ). So, the correlation coefficient ρXY := C(X ,Y )√ V (X ) √ V (Y ) is always between -1 and 1. ▶ If X and Y are independent, C(X ,Y ) = 0. But, the converse is not generally true 14 / 54 Math Review conditional distribution ▶ Suppose X and Y are jointly distributed with the joint PDF fXY (x , y). Then, the conditional PDF of Y given X = x is fY |X (y |x) := fXY (x , y)fX (x) which summarises the distribution of Y when X takes a value x . ▶ If X and Y are independent, fY |X (y |x) = fY (y) and fX |Y (x |y) = fX (x) 15 / 54 Math Review conditional expectation ▶ The conditional expectation of Y given X = x is E [Y |X = x ] = ∫ ∞ −∞ yfY |X (y |x)dy ▶ The conditional variance of Y given X = x is V (Y |X = x) = E [ (Y − E [Y |X = x ])2 ∣∣∣X = x] ▶ E [Y |X = x ] and V (Y |X = x) are functions of x . ▶ When x is not specified, E [Y |X ] and V (Y |X ) are random.