Valuation 8: Econometrics

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Valuation 8 Econometrics

• Why econometrics?
• What are the tasks?
• Specification and estimation
• Hypotheses testing
• Example study

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Last weeks we looked at

• Household production (travel cost) and
  consumption (hedonic) methods where the crucial
  assumption is that the demand for environmental
  quality is expressed through behaviour in other
  markets, e.g., for recreation and housing
• These methods are based on revealed preference or
  surrogate markets

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Why econometrics?

• Analysis
• To test the validity of economic theories
• Policy making
• To test the outcome of different government
  economic policy moves
• Forecasting or prediction
• To predict the value of other variables

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What are the tasks?

• Specification
• From an economic model
• to an econometric model
• Estimation
• Testing hypotheses
• Predictions

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Specification the function

• Include all relevant exogenous variables
• Functional form linear relationship?
• Estimates parameters for a and b are constant for
  all observations

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Specification disturbance (1)

• Expected value is zero

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Specification disturbance (2)

• Variance is constant
• Homoscedasticity vs. heteroscedasticity

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Specification disturbance (3)

• disturbances are not autocorrelated
• disturbances are normally distributed

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Specification disturbance (4)
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OLS - Point estimates
disturbance vs. residual
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OLS R2
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OLS hypotheses testing

• T-test
• F-Test
• P values

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Data and variables

• Data
• Cross-section
• Time-series
• Panel data
• Variables
• Continuous
• Discrete including dummy variables
• Proxy variables

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Functional forms

• Function Implicit Price
• Linear
• Quadratic
• Semi-log
• Logarithm
• Inverse

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Functional forms - Diagnostics

• RESET test
• R2 is of limited use
• Box-Cox test

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Example study

• The amenity value of the Italian climate by David
  Maddison and Andrea Bigano
• Hedonic study
• Data for 95 provinces of Italy from 1991-1995
• Labour income
• Annual housing cost
• Only one hedonic regression
• Expected after tax labour cost net of housing