| Financial Econometrics |
- Question
Econometrics is the application of statistical methods to economic data in order to give empirical content to economic relationships. More precisely, it is “the quantitative analysis of actual economic phenomena based on the concurrent development of theory and observation, related by appropriate methods of inference”.
Linear regression is a basic and commonly used type of predictive analysis in econometrics. The overall idea of regression is to examine two things: (1) does a set of predictor variables do a good job in predicting an outcome (dependent) variable? (2) Which variables, in particular, are significant predictors of the outcome variable, and in what way do they–indicated by the magnitude and sign of the beta estimates–impact the outcome variable? These regression estimates are used to explain the relationship between one dependent variable and one or more independent variables.
- Required:
- Explain the Gauss-Markov theorem famously stating that OLS is BLUE.
- Explain different types of data used for financial analysis (provide examples).
- Discuss how regression is different from correlation providing examples for each.
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