A Guide to Modern Econometrics_5th By Marno Verbeek

Contents
Preface xi
1 Introduction 1
1.1 About Econometrics 1
1.2 The Structure of This Book 3
1.3 Illustrations and Exercises 4
2 An Introduction to Linear Regression 6
2.1 Ordinary Least Squares as an Algebraic Tool 7
2.1.1 Ordinary Least Squares 7
2.1.2 Simple Linear Regression 9
2.1.3 Example: Individual Wages 11
2.1.4 Matrix Notation 11
2.2 The Linear Regression Model 12
2.3 Small Sample Properties of the OLS Estimator 15
2.3.1 The Gauss–Markov Assumptions 15
2.3.2 Properties of the OLS Estimator 16
2.3.3 Example: Individual Wages (Continued) 20
2.4 Goodness-of-Fit 20
2.5 Hypothesis Testing 23
2.5.1 A Simple t-Test 23
2.5.2 Example: Individual Wages (Continued) 25
2.5.3 Testing One Linear Restriction 25
2.5.4 A Joint Test of Significance of Regression
Coefficients 26
2.5.5 Example: Individual Wages (Continued) 28
2.5.6 The General Case 29
2.5.7 Size, Power and p-Values 30
2.5.8 Reporting Regression Results 32
iv CONTENTS
2.6 Asymptotic Properties of the OLS Estimator 33
2.6.1 Consistency 33
2.6.2 Asymptotic Normality 35
2.6.3 Small Samples and Asymptotic Theory 37
2.7 Illustration: The Capital Asset Pricing Model 39
2.7.1 The CAPM as a Regression Model 40
2.7.2 Estimating and Testing the CAPM 41
2.7.3 The World’s Largest Hedge Fund 43
2.8 Multicollinearity 44
2.8.1 Example: Individual Wages (Continued) 47
2.9 Missing Data, Outliers and Influential Observations 48
2.9.1 Outliers and Influential Observations 48
2.9.2 Robust Estimation Methods 50
2.9.3 Missing Observations 51
2.10 Prediction 53
Wrap-up 54
Exercises 55
3 Interpreting and Comparing Regression Models 60
3.1 Interpreting the Linear Model 60
3.2 Selecting the Set of Regressors 65
3.2.1 Misspecifying the Set of Regressors 65
3.2.2 Selecting Regressors 66
3.2.3 Comparing Non-nested Models 71
3.3 Misspecifying the Functional Form 73
3.3.1 Nonlinear Models 73
3.3.2 Testing the Functional Form 74
3.3.3 Testing for a Structural Break 74
3.4 Illustration: Explaining House Prices 76
3.5 Illustration: Predicting Stock Index Returns 79
3.5.1 Model Selection 80
3.5.2 Forecast