Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: THEend8_
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.