Introduction to Econometrics, Univariate

Introduction
and to
Bivariate Analysis

Econometrics,Univariate and
Prof.Pradeep Brijlal

Bivariate

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 What Is Econometrics?
 Econometrics is the use of statistical and mathematical models to develop
theories or test existing hypotheses in economics and to forecast future
trends from historical data. It subjects real-world data to statistical trials
and then compares the results against the theory being tested.

 Economists analyze statistical data to help companies, organizations or

policymakers make important decisions based on predicted economic
trends. People who work in econometrics, a specialized field of economics,
study data and develop theories that have practical applications for
understanding economic concepts, such as scarcity or incentives.

 Depending on whether you are interested in testing an existing theory or in

using existing data to develop a new hypothesis, econometrics can be
subdivided into two major categories: theoretical and applied. Those who
routinely engage in this practice are commonly known as econometricians
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 Types of econometrics
Theoretical econometrics

 Theoretical econometrics is the study of current statistical models'

properties to determine the unknown variables in the models. These
experts work to develop new statistical procedures that can logically
determine unknown variables.

 For example, theoretical econometricians may try to predict a

company's return on an investment over a specific time.

 This type of econometrics focuses on mathematics, statistical

theories and numerical methods, such as probability or correlation
analysis, to ensure new theories can produce accurate conclusions.

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 Types of econometrics

Applied econometrics
 Applied econometrics uses theories to convert qualitative
statements into quantitative statements. These econometricians
work more closely with sets of data to analyze trends and predict
outcomes. They may work closely with their theoretical colleagues to
share data that may change or affect their developing theories.
 Because applied econometricians are closer to the data, they often
run into—and alert their theoretical counterparts to—data attributes
that lead to problems with existing estimation techniques.
 For example, the econometrician might discover that the variance of
the data (how much individual values in a series differ from the overall
average) is changing over time.

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 Tools for Econometrics
Simple linear regression

 A simple linear regression model is a statistical strategy that uses

one variable to predict the value of a second variable.
 There are two types of variables, which are dependent and independent.
 Other variables don't affect independent variables, while a dependent
variable's value changes based on its relationship to an independent
variable.
 The simple linear regression model allows econometricians to analyze the
relationship between these corresponding variables.
 For example, an econometrician might use this model to test a hypothesis
that a person's spending increases when they receive a raise in salary.
 The person's new salary is the independent variable because it remains
constant. Their spending is the dependent variable because 5it may change
based on their salary
 Tools for Econometrics
Multiple regression

 The multiple regression model expands on the simple linear model.

 Instead of one independent variable, it uses two or more to predict
the value of the dependent variable.
 For example, an econometrician might use the multiple regression
model to form a theory that a person's salary increases based on
their years of work experience and education.
 In this example, the years of work experience and education are
independent variables because they remain the same regardless of
other variables. The salary is the dependent variable because it can
change based on the other variables.

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 Different Regression Models

 The most common example is the ordinary least squares (OLS)

regression, which can be conducted on several types of cross-
sectional or time-series data. If you're interested in a binary (yes-
no) outcome—for instance, how likely you are to be fired from a
job based on your productivity—you might use a logistic
regression or a probit model. Today, econometricians have
hundreds of models at their disposal.

 Econometrics is now conducted using statistical analysis software

packages designed for these purposes, such as STATA, SPSS, or
R. These software packages can also easily test for statistical
significance to determine the likelihood that correlations might
arise by chance. R-squared, t-tests, p-values, and null-
hypothesis testing are all methods used by econometricians to
evaluate the validity of their model results.

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 Estimators and Autocorrelation in Econometrics

 An estimator is a statistic that is used to estimate some fact or

measurement about a larger population. Estimators are frequently
used in situations where it is not practical to measure the entire
population. For example, it is not possible to measure the exact
employment rate at any specific time, but it is possible to estimate
unemployment based on a randomly-chosen sample of the
population.

 Autocorrelation measures the relationships between a single

variable at different time periods. For this reason, it is sometimes
called lagged correlation or serial correlation, since it is used to
measure how the past value of a certain variable might predict future
values of the same variable. Autocorrelation is a useful tool for
traders, especially in technical analysis.

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 4 stages of econometrics
1. Develop a theory or hypothesis

Econometricians first establish a is or theory to guide data analysis. To

do this, they define the data's independent and dependent variables.
Then, econometricians use existing economic theories, such as supply
and demand, to form a hypothesis that explains the relationship
between these variables.

2. Specify a statistical model

In this step, econometricians identify a statistical model to examine the
relationship between variables. A common relationship between
variables is linear, which happens when any change to one variable
results in a similar change to the other variables.
To account for non-linear influences on a variable, an econometrician
may add a new variable, which is an error term. This variable, which is
usually zero, represents the margin of error in the model.
Econometricians use it to account for differences between the model's
analysis and actual results.
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 4 stages of econometrics
3. Estimate the model's variables

Econometricians use economic data to estimate any unknown variables

in the model. Often, they use existing statistical procedures or
econometric software to make these calculations. Many econometric
techniques, like cost-effectiveness analysis and software programs,
help make this a straightforward part of the process. Estimating these
variables is important because it helps econometricians evaluate the
accuracy of their theory and make necessary changes.

4. Perform a test

An econometrician conducts a statistical test to determine the validity

of their theory or hypothesis. These tests evaluate a set of data to
determine whether it supports their hypothesis and correctly assesses
the relationships between variables in the model. If the test is
successful, it means the new method is a valid tool for explaining an
economic relationship. If it isn't, the econometrician may change their
statistical model and try again. 10
 Methods of Econometrics

 The first step to econometric methodology is to obtain and

analyze a set of data and define a specific hypothesis that
explains the nature and shape of the set. This data may be, for
example, the historical prices for a stock index, observations
collected from a survey of consumer finances, or unemployment
and inflation rates in different countries.

 If you are interested in the relationship between the annual price

change of the S&P 500 and the unemployment rate, you'd collect
both sets of data. Then, you might test the idea that higher
unemployment leads to lower stock market prices. In this
example, stock market price would be the dependent variable and
the unemployment rate is the independent or explanatory variable.

 .

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 Methods of Econometrics

 The most common relationship is linear, meaning that any

change in the explanatory variable will have a positive
correlation with the dependent variable. This relationship could
be explored with a simple regression model, which amounts to
generating a best-fit line between the two sets of data and
then testing to see how far each data point is, on average, from
that line.

 Note that you can have several explanatory variables in your

analysis—for example, changes to GDP and inflation in
addition to unemployment in explaining stock market prices.
When more than one explanatory variable is used, it is referred
to as multiple linear regression. This is the most commonly
used tool in econometrics.

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 Testing the hypothesis

 The main tool of the fourth stage is hypothesis testing, a formal

statistical procedure during which the researcher makes a specific
statement about the true value of an economic parameter, and a
statistical test determines whether the estimated parameter is
consistent with that hypothesis. If it is not, the researcher must either
reject the hypothesis or make new specifications in the statistical model
and start over.
 If all four stages proceed well, the result is a tool that can be used to
assess the empirical validity of an abstract economic model. The
empirical model may also be used to construct a way to forecast the
dependent variable, potentially helping policymakers make decisions
about changes in monetary and/or fiscal policy to keep the economy on
an even keel.

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 Univariate, Bivariate and Multivariate data and its analysis

Univariate analysis
 Here the data contains just one variable and does not have to deal with the
relationship of a cause and effect.
 Eg. Classroom survey: The analysts would want to count the number of
boys and girls in the room. The data here simply talks about the number
which is a single variable and the variable quantity. The main objective of
the univariate analysis is to describe the data in order to find out the
patterns in the data. This is done by looking at the mean, mode,
median, standard deviation, dispersion, etc.

 Univariate analysis is basically the simplest form to analyze data. Uni

means one and this means that the data has only one kind of variable. The
major reason for univariate analysis is to use the data to describe. The
analysis will take data, summarise it, and then find some pattern in the
data.
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 Univariate Analysis
 Univariate analysis is conducted in many ways and most of these ways are of a
descriptive nature. These are the Frequency Distribution Tables, Frequency
Polygons, Histograms, Bar Charts and Pie Charts

Frequency distribution table

 Frequency means how often something takes place.

 The observation frequency tells the number of times for the occurrence of an
event.

 The frequency distribution table may show categorical or qualitative and

numeric or quantitative variables. The distribution gives a snapshot of the data
and lets you find out the patterns

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Univariate

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Bar Charts

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Histogram

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 Frequency Polygon

 Used to compare the data sets or in order to display the

cumulative frequency distribution. The frequency polygon will
be represented as a line graph

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 Pie Chart

 The graph is divided into pieces where each piece is

proportional to the fraction of the complete category. So each
slice of the pie in the pie chart is relative to categories size.

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 BIVARIATE ANALYSIS

 Bivariate analysis means the analysis of the bivariate data.

This is a single statistical analysis that is used to find out the
relationship that exists between two value sets. The
variables that are involved are X and Y.

 Univariate analysis is when only one variable is analyzed.

 Bivariate data analysis is when exactly two variables are

analyzed.

 Multivariate analysis is when more than two variables get

analyzed.

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 Bivariate Analysis

 Scatter plots — This gives an idea of the patterns that can

be formed using the two variables

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 Bivariate Analysis

 Regression Analysis — This uses a wide range of tools to

determine how the data post could be related. The post may
follow an exponential curve. The regression analysis gives the
equation for a line or curve. It also helps to find the
correlation coefficient.

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 Bivariate Analysis

 Correlation Coefficients –The coefficient lets you know if the

data in question are related. When the correlation coefficient is
zero then this means that the variables are not related. If the
correlation coefficient is a positive or a negative 1 then this
means that the variables are perfectly correlated.

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Bivariate Analysis

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