Homework Set 3, ECO 311, Spring 2014

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1 Homework Set 3, ECO 311, Spring 2014 Due Date: At the beginning of class on May 7, 2014 Instruction: There are eleven questions. Each question is worth 2 points. You need to submit the answers of only five questions which you choose. The maximum point you can get is 10 points. For the purpose of preparing exam, you need to understand all questions. I will discuss the homework on the due date. Please do not ask me to go through the homework before the due date. However, you can discuss the homework with your classmates. You need to submit the homework individually though. Q1: Quadratic and Interaction Terms Use the data file 311 house.dta. You may read example 6.2 and 6.3 in the textbook. 1. (1 point) Report the regression with a quadratic term rprice = β 0 +β 1 age+β 2 age 2 +u. Explain whether age 2 should be included. When a house gets older, does the house price fall at increasing or decreasing rate? Please draw a graph in which rprice is on the vertical axis and age is on the horizontal axis. Hint: stata command to get the quadratic term is gen agesq = age^2 2. (1 point) Report the regression with an interaction term rprice = β 0 +β 1 age+β 2 age bath + u. Compare two houses, one with one bathroom and one with two bathrooms. Which one s value falls faster when it gets older? Why? Q2: Log and Adjusted R Squared Use the data file 311 house.dta. You may read Table 2.3, page , (5th edition) of the textbook. 1. (1.5 point) Report regression log(rprice) = β 0 +β 1 age+u, and regression log(rprice) = β 0 +β 1 log(age)+u. Interpret ˆβ 1 in each regression. What is the advantage of using log of rprice as the dependent variable? Is the coefficient of age economically significant? Hint: stata command to get the log is gen logrprice = log(rprice) 2. (0.5 point) How to tell which regression fits data better? Why? (Hint: consider adjusted R 2 ) 1

2 Q3: Two Sample T Test and Dummy Variable Use the data file 311 wage1.dta. 1. (1.5 point) Reports the results of following commands reg wage female sort female ttest wage, by(female) Interpret the coefficient of female produced by the command reg wage female. Explain why the absolute value of t value for coefficient of female in command reg is the same as the absolute value of two sample t test in command ttest. 2. (0.5 point) From the ttest table you may notice that the standard deviation is for male and for female. Can you modify the ttest command in order to allow for unequal variances? Q4: Interpreting Coefficients of Dummy Variables Use the data file 311 wage1.dta. 1. (1 point) Run the following regression lwage = β 0 + β 1 female + β 2 profocc + u where lwage is the log of wage. Please interpret ˆβ 1 and ˆβ 2. Hint: you can see the explanation of each variable (or label of the variable) by using command des 2. (1 point) Run a new regression lwage = c 0 +c 1 female+c 2 profocc+c 3 profocc*female+ u. Please interpret ĉ 3, and explain what the interaction term profocc*female can capture. Q5: Testing Difference in Regression Functions across Groups Use the data file 311 wage1.dta. You may read page (5th edition) of the textbook 1. (1 point) Report two separate regressions, one for female and one for male. The regression is log(wage) = β 0 + β 1 educ + u. Please interpret the coefficient of educ in each regression. Hint: stata command to run the regression for female is reg lwage educ if female==1 2

3 2. (1 point) Test the null hypothesis at 5% level that the relation between log wage and educ does NOT depend on gender. Put differently, you need to run the Chow test for the null hypothesis of no structural change. Q6: Equal and Unequal Weights This problem intends to show the motivation for weighted least squares (WLS). Suppose a sample contains two independent observations (X 1, X 2 ) with E(X 1 ) = µ, var(x 1 ) = 4, E(X 2 ) = µ, var(x 2 ) = 1, cov(x 1, X 2 ) = 0. Note that the two observations have unequal variances (heteroskedasticity). There are two estimators for µ. The sample mean uses equal weights X = 1X X 2 2. The weighted mean uses unequal weights X = 1X X 5 2. X 1 receives smaller weight because its variance is greater than X (1 point) Please show both X and X are unbiased estimator for µ 2. (1 point) Please show X is better (more efficient) than X because var( X) < var( X) Q7: White Test for Heteroskedasticity This problem intends to show two alternative ways of checking heteroskedasticity. Please use the data file 311 wage1.dta. 1. (1 point) report the regression wage = β 0 +β 1 educ+β 2 exper+u. Then find the sample deviation of the residual for high school graduate (educ=12) and a college graduate (educ 16). Are they equal? Does the result imply that the variance varies with educ? Hint: save the residual and then use sum..if (1 point) please do self-learning and report the White test (not Breusch-Pagan test) for heteroskedasticity, and draw a conclusion. The regression is 8.20 on page 279 of textbook. The null hypothesis of homoskedasticity is H 0 : δ 1 = δ 2 = 0 for that regression. You need to report the F test. Hint: the command to save the predicted value is predict yhat, xb. You need to generate the squared predicted value. Q8: Heteroskedasticity-Robust Statistics and Weighted Least Squares Please use the data file 311 wage1.dta. 1. (1 point) report the conventional standard error, t value and p value and heteroskedasticityrobust standard error, t value and p value for the regression wage = β 0 + β 1 educ + β 2 exper + u. Compare them. 3

4 2. (1 point) report the WLS (feasible GLS) estimates for the above regression. Read page of the textbook. Q9: Working with Time and Date Please use the data file 311 ez.dta, where the variable uclms is the monthly unemployment claims in Anderson township in Indiana from January 1980 through November In 1984, an enterprize zone (EZ) was located in Anderson. This data file is special because the time information is in two separate variables: the variable month is string (in uppercase), while the variable year is integer. We need to combine these two variables first. 1. (1 point) Please generate a string variable called time that combines month and year. Hint: the stata command is gen time = string(year) + month gen timen = date(time, "YM") We first transform the integer variable year to a string variable using function string, then combine it with month, which is string. Next we use function date to convert it to a time variable called timen, which is the days since January (1 point) Please draw the time series plot for uclms Hint: the stata command is format timen %td tsset timen tsline uclms Is uclms trending? Or showing seasonality? Q10: Monthly Dummy, Event Dummy, and Trend Please use the data file 311 ez.dta, see Q9 for description of the data file. 1. (1 point) Please generate (in total 12) dummy variables, called monthly dummy, for January, February,... and December. Denote them D1, D2,..., D12. Also generate the linear trend variable called trend. Hint: the command to generate January dummy and trend is 4

5 gen D1 = (month=="jan") gen trend = _n Note JAN are uppercase letters. Stata is case-sensitive. report the regression uclms = β 0 + β 1 D β 11 D11 + β 12 trend + u. Please interpret β 0, β 1, β 12. Is there a trend in uclms? Note we use only 11 monthly dummies to avoid dummy variable trap. 2. (1 point) report the regression uclms = β 0 + β 1 D β 11 D11 + β 12 trend + β 13 ez + u. Please interpret β 13. Q11: Autoregression and Forecasting This problem intends to show how to do forecasting using autoregressive (AR) model. Please use the data file 311 ez.dta, see Q9 for description of the data file. 1. (1 point) report the AR(1) regression uclms t = β 0 + β 1 uclms t 1 + u, and AR(2) regression uclms t = β 0 + β 1 uclms t 1 + β 2 uclms t 2 + u. Which regression is better? Why? 2. (1 point) Please find the first-step forecast uclms n+1 and second-step forecast uclms n+2 based on the AR(2) regression, where n =

Homework Set 2, ECO 311, Spring 2014

Homework Set 2, ECO 311, Spring 2014 Due Date: At the beginning of class on March 31, 2014 Instruction: There are twelve questions. Each question is worth 2 points. You need to submit the answers of only