This vignette reproduces examples from various chapters of Introductory Econometrics: A Modern Approach, 7e by Jeffrey M. Wooldridge. Each example illustrates how to load data, build econometric models, and compute estimates with R.
In addition, the Appendix cites a few sources using R for econometrics. Of note, in 2020 Florian Hess published a 2nd edition of Using R for Introductory Econometrics; it is excellent. The Hess text is a companion to wooldridge for R
users, and offers an in depth treatment with several worked examples from each chapter. Indeed, his exxample use this wooldridge
package as well.
Now, install and load the wooldridge
package and lets get started!
install.packages("wooldridge")
library(wooldridge)
Example 2.10:
A Log Wage EquationLoad the wage1
data and check out the documentation.
data("wage1")
?wage1
The documentation indicates these are data from the 1976 Current Population Survey, collected by Henry Farber when he and Wooldridge were colleagues at MIT in 1988.
\(educ\): years of education
\(wage\): average hourly earnings
\(lwage\): log of the average hourly earnings
First, make a scatter-plot of the two variables and look for possible patterns in the relationship between them.
It appears that on average, more years of education, leads to higher wages.
The example in the text is interested in the return to another year of education, or what the percentage change in wages one might expect for each additional year of education. To do so, one must use the \(log(\)wage
\()\). This has already been computed in the data set and is defined as lwage
.
The textbook provides excellent discussions around these topics, so please consult it.
Build a linear model to estimate the relationship between the log of wage (lwage
) and education (educ
).
\[\widehat{log(wage)} = \beta_0 + \beta_1educ\]
<- lm(lwage ~ educ, data = wage1) log_wage_model
Print the summary
of the results.
summary(log_wage_model)
Dependent variable: | |
lwage | |
educ | 0.08274^{***} (0.00757) |
Constant | 0.58377^{***} (0.09734) |
Observations | 526 |
R^{2} | 0.18581 |
Adjusted R^{2} | 0.18425 |
Residual Std. Error | 0.48008 (df = 524) |
F Statistic | 119.58160^{***} (df = 1; 524) |
Note: | ^{}p<0.1; ^{}p<0.05; ^{}p<0.01 |
Plot the \(log(\)wage
\()\) vs educ
. The blue line represents the least squares fit.
Example 3.2:
Hourly Wage EquationCheck the documentation for variable information
?wage1
\(lwage\): log of the average hourly earnings
\(educ\): years of education
\(exper\): years of potential experience
\(tenutre\): years with current employer
Plot the variables against lwage
and compare their distributions and slope (\(\beta\)) of the simple regression lines.
Estimate the model regressing educ, exper, and tenure against log(wage).
\[\widehat{log(wage)} = \beta_0 + \beta_1educ + \beta_3exper + \beta_4tenure\]
<- lm(lwage ~ educ + exper + tenure, data = wage1) hourly_wage_model
Print the estimated model coefficients:
coefficients(hourly_wage_model)
Coefficients | |
---|---|
(Intercept) | 0.2844 |
educ | 0.0920 |
exper | 0.0041 |
tenure | 0.0221 |
Plot the coefficients, representing percentage impact of each variable on \(log(\)wage
\()\) for a quick comparison.
Example 4.1
Hourly Wage EquationUsing the same model estimated in example: 3.2
, examine and compare the standard errors associated with each coefficient. Like the textbook, these are contained in parenthesis next to each associated coefficient.
summary(hourly_wage_model)
Dependent variable: | |
lwage | |
educ | 0.09203^{***} (0.00733) |
exper | 0.00412^{**} (0.00172) |
tenure | 0.02207^{***} (0.00309) |
Constant | 0.28436^{***} (0.10419) |
Observations | 526 |
R^{2} | 0.31601 |
Adjusted R^{2} | 0.31208 |
Residual Std. Error | 0.44086 (df = 522) |
F Statistic | 80.39092^{***} (df = 3; 522) |
Note: | ^{}p<0.1; ^{}p<0.05; ^{}p<0.01 |
For the years of experience variable, or exper
, use coefficient and Standard Error to compute the \(t\) statistic:
\[t_{exper} = \frac{0.004121}{0.001723} = 2.391\]
Fortunately, R
includes \(t\) statistics in the summary
of model diagnostics.
summary(hourly_wage_model)$coefficients
Estimate | Std. Error | t value | Pr(>|t|) | |
---|---|---|---|---|
(Intercept) | 0.28436 | 0.10419 | 2.72923 | 0.00656 |
educ | 0.09203 | 0.00733 | 12.55525 | 0.00000 |
exper | 0.00412 | 0.00172 | 2.39144 | 0.01714 |
tenure | 0.02207 | 0.00309 | 7.13307 | 0.00000 |
Plot the \(t\) statistics for a visual comparison:
Example 4.7
Effect of Job Training on Firm Scrap RatesLoad the jtrain
data set.
data("jtrain")
?jtrain
From H. Holzer, R. Block, M. Cheatham, and J. Knott (1993), Are Training Subsidies Effective? The Michigan Experience, Industrial and Labor Relations Review 46, 625-636. The authors kindly provided the data.
\(year:\) 1987, 1988, or 1989
\(union:\) =1 if unionized
\(lscrap:\) Log(scrap rate per 100 items)
\(hrsemp:\) (total hours training) / (total employees trained)
\(lsales:\) Log(annual sales, $)
\(lemploy:\) Log(umber of employees at plant)
First, use the subset
function and it’s argument by the same name to return observations which occurred in 1987 and are not union. At the same time, use the select
argument to return only the variables of interest for this problem.
<- subset(jtrain, subset = (year == 1987 & union == 0),
jtrain_subset select = c(year, union, lscrap, hrsemp, lsales, lemploy))
Next, test for missing values. One can “eyeball” these with R Studio’s View
function, but a more precise approach combines the sum
and is.na
functions to return the total number of observations equal to NA
.
sum(is.na(jtrain_subset))
## [1] 156
While R
’s lm
function will automatically remove missing NA
values, eliminating these manually will produce more clearly proportioned graphs for exploratory analysis. Call the na.omit
function to remove all missing values and assign the new data.frame
object the name jtrain_clean
.
<- na.omit(jtrain_subset) jtrain_clean
Use jtrain_clean
to plot the variables of interest against lscrap
. Visually observe the respective distributions for each variable, and compare the slope (\(\beta\)) of the simple regression lines.
Now create the linear model regressing hrsemp
(total hours training/total employees trained), lsales
(log of annual sales), and lemploy
(the log of the number of the employees), against lscrap
(the log of the scrape rate).
\[lscrap = \alpha + \beta_1 hrsemp + \beta_2 lsales + \beta_3 lemploy\]
<- lm(lscrap ~ hrsemp + lsales + lemploy, data = jtrain_clean) linear_model
Finally, print the complete summary diagnostics of the model.
summary(linear_model)
Dependent variable: | |
lscrap | |
hrsemp | -0.02927 (0.02280) |
lsales | -0.96203^{**} (0.45252) |
lemploy | 0.76147^{*} (0.40743) |
Constant | 12.45837^{**} (5.68677) |
Observations | 29 |
R^{2} | 0.26243 |
Adjusted R^{2} | 0.17392 |
Residual Std. Error | 1.37604 (df = 25) |
F Statistic | 2.96504^{*} (df = 3; 25) |
Note: | ^{}p<0.1; ^{}p<0.05; ^{}p<0.01 |
Example 5.1:
Housing Prices and Distance From an IncineratorLoad the hprice3
data set.
data("hprice3")
\(lprice:\) Log(selling price)
\(ldist:\) Log(distance from house to incinerator, feet)
\(larea:\) Log(square footage of house)
Graph the prices of housing against distance from an incinerator:
Next, model the \(log(\)price
\()\) against the \(log(\)dist
\()\) to estimate the percentage relationship between the two.
\[price = \alpha + \beta_1 dist\]
<- lm(lprice ~ ldist, data = hprice3) price_dist_model
Create another model that controls for “quality” variables, such as square footage area
per house.
\[price = \alpha + \beta_1 dist + \beta_2 area\]
<- lm(lprice ~ ldist + larea, data = hprice3) price_area_model
Compare the coefficients of both models. Notice that adding area
improves the quality of the model, but also reduces the coefficient size of dist
.
summary(price_dist_model)
summary(price_area_model)
Dependent variable: | ||
lprice | ||
(1) | (2) | |
ldist | 0.31722^{***} (0.04811) | 0.19623^{***} (0.03816) |
larea | 0.78368^{***} (0.05358) | |
Constant | 8.25750^{***} (0.47383) | 3.49394^{***} (0.49065) |
Observations | 321 | 321 |
R^{2} | 0.11994 | 0.47385 |
Adjusted R^{2} | 0.11718 | 0.47054 |
Residual Std. Error | 0.41170 (df = 319) | 0.31883 (df = 318) |
F Statistic | 43.47673^{***} (df = 1; 319) | 143.19470^{***} (df = 2; 318) |
Note: | ^{}p<0.1; ^{}p<0.05; ^{}p<0.01 |
Graphing illustrates the larger coefficient for area
.
Example 6.1:
Effects of Pollution on Housing Prices, standardized.Load the hprice2
data and view the documentation.
data("hprice2")
?hprice2
Data from Hedonic Housing Prices and the Demand for Clean Air, by Harrison, D. and D.L.Rubinfeld, Journal of Environmental Economics and Management 5, 81-102. Diego Garcia, a former Ph.D. student in economics at MIT, kindly provided these data, which he obtained from the book Regression Diagnostics: Identifying Influential Data and Sources of Collinearity, by D.A. Belsey, E. Kuh, and R. Welsch, 1990. New York: Wiley.
\(price\): median housing price.
\(nox\): Nitrous Oxide concentration; parts per million.
\(crime\): number of reported crimes per capita.
\(rooms\): average number of rooms in houses in the community.
\(dist\): weighted distance of the community to 5 employment centers.
\(stratio\): average student-teacher ratio of schools in the community.
\[price = \beta_0 + \beta_1nox + \beta_2crime + \beta_3rooms + \beta_4dist + \beta_5stratio + \mu\]
Estimate the usual lm
model.
<- lm(price ~ nox + crime + rooms + dist + stratio, data = hprice2) housing_level
Estimate the same model, but standardized coefficients by wrapping each variable with R’s scale
function:
\[\widehat{zprice} = \beta_1znox + \beta_2zcrime + \beta_3zrooms + \beta_4zdist + \beta_5zstratio\]
<- lm(scale(price) ~ 0 + scale(nox) + scale(crime) + scale(rooms) + scale(dist) + scale(stratio), data = hprice2) housing_standardized
Compare results, and observe
summary(housing_level)
summary(housing_standardized)
Dependent variable: | ||
price | scale(price) | |
(1) | (2) | |
nox | -2,706.43300^{***} (354.08690) | |
crime | -153.60100^{***} (32.92883) | |
rooms | 6,735.49800^{***} (393.60370) | |
dist | -1,026.80600^{***} (188.10790) | |
stratio | -1,149.20400^{***} (127.42870) | |
scale(nox) | -0.34045^{***} (0.04450) | |
scale(crime) | -0.14328^{***} (0.03069) | |
scale(rooms) | 0.51389^{***} (0.03000) | |
scale(dist) | -0.23484^{***} (0.04298) | |
scale(stratio) | -0.27028^{***} (0.02994) | |
Constant | 20,871.13000^{***} (5,054.59900) | |
Observations | 506 | 506 |
R^{2} | 0.63567 | 0.63567 |
Adjusted R^{2} | 0.63202 | 0.63203 |
Residual Std. Error | 5,586.19800 (df = 500) | 0.60601 (df = 501) |
F Statistic | 174.47330^{***} (df = 5; 500) | 174.82220^{***} (df = 5; 501) |
Note: | ^{}p<0.1; ^{}p<0.05; ^{}p<0.01 |
Example 6.2:
Effects of Pollution on Housing Prices, Quadratic Interactive TermModify the housing model from example 4.5
, adding a quadratic term in rooms:
\[log(price) = \beta_0 + \beta_1log(nox) + \beta_2log(dist) + \beta_3rooms + \beta_4rooms^2 + \beta_5stratio + \mu\]
.5 <- lm(lprice ~ lnox + log(dist) + rooms + stratio, data = hprice2)
housing_model_4
.2 <- lm(lprice ~ lnox + log(dist) + rooms + I(rooms^2) + stratio,
housing_model_6data = hprice2)
Compare the results with the model from example 6.1
.
summary(housing_model_4.5)
summary(housing_model_6.2)
Dependent variable: | ||
lprice | ||
(1) | (2) | |
lnox | -0.95354^{***} (0.11674) | -0.90168^{***} (0.11469) |
log(dist) | -0.13434^{***} (0.04310) | -0.08678^{**} (0.04328) |
rooms | 0.25453^{***} (0.01853) | -0.54511^{***} (0.16545) |
I(rooms2) | 0.06226^{***} (0.01280) | |
stratio | -0.05245^{***} (0.00590) | -0.04759^{***} (0.00585) |
Constant | 11.08386^{***} (0.31811) | 13.38548^{***} (0.56647) |
Observations | 506 | 506 |
R^{2} | 0.58403 | 0.60281 |
Adjusted R^{2} | 0.58071 | 0.59884 |
Residual Std. Error | 0.26500 (df = 501) | 0.25921 (df = 500) |
F Statistic | 175.85520^{***} (df = 4; 501) | 151.77040^{***} (df = 5; 500) |
Note: | ^{}p<0.1; ^{}p<0.05; ^{}p<0.01 |
Estimate the minimum turning point at which the rooms
interactive term changes from negative to positive.
\[x = \frac{\hat{\beta_1}}{2\hat{\beta_2}}\]
<- summary(housing_model_6.2)$coefficients["rooms",1]
beta_1 <- summary(housing_model_6.2)$coefficients["I(rooms^2)",1]
beta_2 <- abs(beta_1 / (2*beta_2))
turning_point
print(turning_point)
## [1] 4.37763
Compute the percent change across a range of average rooms. Include the smallest, turning point, and largest.
<- c(min(hprice2$rooms), 4, turning_point, 5, 5.5, 6.45, 7.5, max(hprice2$rooms))
Rooms <- 100*(beta_1 + 2*beta_2*Rooms)
Percent.Change
kable(data.frame(Rooms, Percent.Change))
Rooms | Percent.Change |
---|---|
3.56000 | -10.181324 |
4.00000 | -4.702338 |
4.37763 | 0.000000 |
5.00000 | 7.749903 |
5.50000 | 13.976023 |
6.45000 | 25.805651 |
7.50000 | 38.880503 |
8.78000 | 54.819367 |
Graph the log of the selling price against the number of rooms. Superimpose a simple model as well as a quadratic model and examine the difference.
Example 7.4:
Housing Price Regression, Qualitative Binary variableThis time, use the hrprice1
data.
data("hprice1")
?hprice1
Data collected from the real estate pages of the Boston Globe during 1990. These are homes that sold in the Boston, MA area.
\(lprice:\) Log(house price, $1000s)
\(llotsize:\) Log(size of lot in square feet)
\(lsqrft:\) Log(size of house in square feet)
\(bdrms:\) number of bdrms
\(colonial:\) =1 if home is colonial style
\[\widehat{log(price)} = \beta_0 + \beta_1log(lotsize) + \beta_2log(sqrft) + \beta_3bdrms + \beta_4colonial \]
Estimate the coefficients of the above linear model on the hprice
data set.
<- lm(lprice ~ llotsize + lsqrft + bdrms + colonial, data = hprice1) housing_qualitative
summary(housing_qualitative)
Dependent variable: | |
lprice | |
llotsize | 0.16782^{***} (0.03818) |
lsqrft | 0.70719^{***} (0.09280) |
bdrms | 0.02683 (0.02872) |
colonial | 0.05380 (0.04477) |
Constant | -1.34959^{**} (0.65104) |
Observations | 88 |
R^{2} | 0.64907 |
Adjusted R^{2} | 0.63216 |
Residual Std. Error | 0.18412 (df = 83) |
F Statistic | 38.37846^{***} (df = 4; 83) |
Note: | ^{}p<0.1; ^{}p<0.05; ^{}p<0.01 |
Example 8.9:
Determinants of Personal Computer Ownership\[\widehat{PC} = \beta_0 + \beta_1hsGPA + \beta_2ACT + \beta_3parcoll + \beta_4colonial \] Christopher Lemmon, a former MSU undergraduate, collected these data from a survey he took of MSU students in Fall 1994. Load gpa1
and create a new variable combining the fathcoll
and mothcoll
, into parcoll
. This new column indicates if either parent went to college.
data("gpa1")
$parcoll <- as.integer(gpa1$fathcoll==1 | gpa1$mothcoll)
gpa1
<- lm(PC ~ hsGPA + ACT + parcoll, data = gpa1) GPA_OLS
Calculate the weights and then pass them to the weights
argument.
<- GPA_OLS$fitted.values * (1-GPA_OLS$fitted.values)
weights
<- lm(PC ~ hsGPA + ACT + parcoll, data = gpa1, weights = 1/weights) GPA_WLS
Compare the OLS and WLS model in the table below:
Dependent variable: | ||
PC | ||
(1) | (2) | |
hsGPA | 0.06539 (0.13726) | 0.03270 (0.12988) |
ACT | 0.00056 (0.01550) | 0.00427 (0.01545) |
parcoll | 0.22105^{**} (0.09296) | 0.21519^{**} (0.08629) |
Constant | -0.00043 (0.49054) | 0.02621 (0.47665) |
Observations | 141 | 141 |
R^{2} | 0.04153 | 0.04644 |
Adjusted R^{2} | 0.02054 | 0.02556 |
Residual Std. Error (df = 137) | 0.48599 | 1.01624 |
F Statistic (df = 3; 137) | 1.97851 | 2.22404^{*} |
Note: | ^{}p<0.1; ^{}p<0.05; ^{}p<0.01 |
Example 9.8:
R&D Intensity and Firm Size\[rdintens = \beta_0 + \beta_1sales + \beta_2profmarg + \mu\]
From Businessweek R&D Scoreboard, October 25, 1991. Load the data and estimate the model.
data("rdchem")
<- lm(rdintens ~ sales + profmarg, data = rdchem) all_rdchem
Plotting the data reveals the outlier on the far right of the plot, which will skew the results of our model.
So, we can estimate the model without that data point to gain a better understanding of how sales
and profmarg
describe rdintens
for most firms. We can use the subset
argument of the linear model function to indicate that we only want to estimate the model using data that is less than the highest sales.
<- lm(rdintens ~ sales + profmarg, data = rdchem,
smallest_rdchem subset = (sales < max(sales)))
The table below compares the results of both models side by side. By removing the outlier firm, \(sales\) become a more significant determination of R&D expenditures.
Dependent variable: | ||
rdintens | ||
(1) | (2) | |
sales | 0.00005 (0.00004) | 0.00019^{**} (0.00008) |
profmarg | 0.04462 (0.04618) | 0.04784 (0.04448) |
Constant | 2.62526^{***} (0.58553) | 2.29685^{***} (0.59180) |
Observations | 32 | 31 |
R^{2} | 0.07612 | 0.17281 |
Adjusted R^{2} | 0.01240 | 0.11372 |
Residual Std. Error | 1.86205 (df = 29) | 1.79218 (df = 28) |
F Statistic | 1.19465 (df = 2; 29) | 2.92476^{*} (df = 2; 28) |
Note: | ^{}p<0.1; ^{}p<0.05; ^{}p<0.01 |
Example 10.2:
Effects of Inflation and Deficits on Interest Rates\[\widehat{i3} = \beta_0 + \beta_1inf_t + \beta_2def_t\] Data from the Economic Report of the President, 2004, Tables B-64, B-73, and B-79.
data("intdef") # load data
# load eXtensible Time Series package.
# xts is excellent for time series plots and
# properly indexing time series.
library(xts)
# create xts object from data.frame
# First, index year as yearmon class of monthly data.
# Note: I add 11/12 to set the month to December, end of year.
<- zoo::as.yearmon(intdef$year + 11/12)
index # Next, create the xts object, ordering by the index above.
<- xts(intdef[ ,-1], order.by = index)
intdef.xts # extract 3-month Tbill, inflation, and deficit data
<- intdef.xts[ ,c("i3", "inf", "def")]
intdef.xts # rename with clearer names
colnames(intdef.xts) <- c("Tbill3mo", "cpi", "deficit")
# plot the object, add a title, and place legend at top left.
plot(x = intdef.xts,
main = "Inflation, Deficits, and Interest Rates",
legend.loc = "topleft")
# Run a Linear regression model
<- lm(Tbill3mo ~ cpi + deficit, data = intdef.xts) tbill_model
Dependent variable: | |
Tbill3mo | |
cpi | 0.60587^{***} (0.08213) |
deficit | 0.51306^{***} (0.11838) |
Constant | 1.73327^{***} (0.43197) |
Observations | 56 |
R^{2} | 0.60207 |
Adjusted R^{2} | 0.58705 |
Residual Std. Error | 1.84316 (df = 53) |
F Statistic | 40.09424^{***} (df = 2; 53) |
Note: | ^{}p<0.1; ^{}p<0.05; ^{}p<0.01 |
Now lets update the example with current data, pull from the Federal Reserve Economic Research (FRED) using the quantmod package. Other than the convenient API, the package also formats time series data into xts: eXtensible Time Series objects, which add many feature and benefits when working with time series.
library(quantmod)
# Tbill, 3 month
getSymbols("TB3MS", src = "FRED")
## [1] "TB3MS"
# convert to annual observations and convert index to type `yearmon`.
<- to.yearly(TB3MS, OHLC=FALSE, drop.time = TRUE)
TB3MS index(TB3MS) <- zoo::as.yearmon(index(TB3MS))
# Inflation
getSymbols("FPCPITOTLZGUSA", src = "FRED")
## [1] "FPCPITOTLZGUSA"
# Convert the index to yearmon and shift FRED's Jan 1st to Dec
index(FPCPITOTLZGUSA) <- zoo::as.yearmon(index(FPCPITOTLZGUSA)) + 11/12
# Rename and update column names
<- FPCPITOTLZGUSA
inflation colnames(inflation) <- "inflation"
## Deficit, percent of GDP: Federal outlays - federal receipts
# Download outlays
getSymbols("FYFRGDA188S", src = "FRED")
## [1] "FYFRGDA188S"
# Lets move the index from Jan 1st to Dec 30th/31st
index(FYFRGDA188S) <- zoo::as.yearmon(index(FYFRGDA188S)) + 11/12
# Rename and update column names
<- FYFRGDA188S
outlays colnames(outlays) <- "outlays"
# Download receipts
getSymbols("FYONGDA188S", src = "FRED")
## [1] "FYONGDA188S"
# Lets move the index from Jan 1st to Dec 30th/31st
index(FYONGDA188S) <- zoo::as.yearmon(index(FYONGDA188S)) + 11/12
# Rename and update column names
<- FYONGDA188S
receipts colnames(receipts) <- "receipts"
Now that all data has been downloaded, we can calculate the deficit from the federal outlays
and receipts
data. Next, we will merge our new deficit
variable with inflation
and TB3MS
variables. As these are all xts
times series objects, the merge
function will automatically key off each series time date index, insuring integrity and alignment among each observation and its respective date. Additionally, xts provides easy chart construction with its plot method.
# create deficits from outlays - receipts
# xts objects respect their indexing and outline the future
<- outlays - receipts
deficit colnames(deficit) <- "deficit"
# Merge and remove leading and trailing NAs for a balanced data matrix
<- merge(TB3MS, inflation, deficit)
intdef_updated <- zoo::na.trim(intdef_updated)
intdef_updated
#Plot all
plot(intdef_updated,
main = "T-bill (3mo rate), inflation, and deficit (% of GDP)",
legend.loc = "topright",)
Now lets run the model again. Inflation plays a much more prominent role in the 3 month T-bill rate, than the deficit.
<- lm(TB3MS ~ inflation + deficit, data = intdef_updated) updated_model
Dependent variable: | |
TB3MS | |
inflation | 0.88001^{***} (0.09313) |
deficit | 0.20756^{**} (0.09259) |
Constant | 1.79353^{***} (0.52477) |
Observations | 61 |
R^{2} | 0.63996 |
Adjusted R^{2} | 0.62755 |
Residual Std. Error | 1.97754 (df = 58) |
F Statistic | 51.54762^{***} (df = 2; 58) |
Note: | ^{}p<0.1; ^{}p<0.05; ^{}p<0.01 |
Example 11.7:
Wages and Productivity\[\widehat{log(hrwage_t)} = \beta_0 + \beta_1log(outphr_t) + \beta_2t + \mu_t\] Data from the Economic Report of the President, 1989, Table B-47. The data are for the non-farm business sector.
data("earns")
<- lm(lhrwage ~ loutphr + t, data = earns) wage_time
<- lm(diff(lhrwage) ~ diff(loutphr), data = earns) wage_diff
Dependent variable: | ||
lhrwage | diff(lhrwage) | |
(1) | (2) | |
loutphr | 1.63964^{***} (0.09335) | |
t | -0.01823^{***} (0.00175) | |
diff(loutphr) | 0.80932^{***} (0.17345) | |
Constant | -5.32845^{***} (0.37445) | -0.00366 (0.00422) |
Observations | 41 | 40 |
R^{2} | 0.97122 | 0.36424 |
Adjusted R^{2} | 0.96971 | 0.34750 |
Residual Std. Error (df = 38) | 0.02854 | 0.01695 |
F Statistic | 641.22430^{***} (df = 2; 38) | 21.77054^{***} (df = 1; 38) |
Note: | ^{}p<0.1; ^{}p<0.05; ^{}p<0.01 |
Example 12.8:
Heteroskedasticity and the Efficient Markets HypothesisThese are Wednesday closing prices of value-weighted NYSE average, available in many publications. Wooldridge does not recall the particular source used when he collected these data at MIT, but notes probably the easiest way to get similar data is to go to the NYSE web site, www.nyse.com.
\[return_t = \beta_0 + \beta_1return_{t-1} + \mu_t\]
data("nyse")
?nyse
<-lm(return ~ return_1, data = nyse) return_AR1
\[\hat{\mu^2_t} = \beta_0 + \beta_1return_{t-1} + residual_t\]
<- residuals(return_AR1)
return_mu <- lm(return_mu^2 ~ return_1, data = return_AR1$model) mu2_hat_model
Dependent variable: | ||
return | return_mu2 | |
(1) | (2) | |
return_1 | 0.05890 (0.03802) | -1.10413^{***} (0.20140) |
Constant | 0.17963^{**} (0.08074) | 4.65650^{***} (0.42768) |
Observations | 689 | 689 |
R^{2} | 0.00348 | 0.04191 |
Adjusted R^{2} | 0.00203 | 0.04052 |
Residual Std. Error (df = 687) | 2.11040 | 11.17847 |
F Statistic (df = 1; 687) | 2.39946 | 30.05460^{***} |
Note: | ^{}p<0.1; ^{}p<0.05; ^{}p<0.01 |
Example 12.9:
ARCH in Stock Returns\[\hat{\mu^2_t} = \beta_0 + \hat{\mu^2_{t-1}} + residual_t\]
We still have return_mu
in the working environment so we can use it to create \(\hat{\mu^2_t}\), (mu2_hat
) and \(\hat{\mu^2_{t-1}}\) (mu2_hat_1
). Notice the use R
’s matrix subset operations to perform the lag operation. We drop the first observation of mu2_hat
and squared the results. Next, we remove the last observation of mu2_hat_1
using the subtraction operator combined with a call to the NROW
function on return_mu
. Now, both contain \(688\) observations and we can estimate a standard linear model.
<- return_mu[-1]^2
mu2_hat <- return_mu[-NROW(return_mu)]^2
mu2_hat_1 <- lm(mu2_hat ~ mu2_hat_1) arch_model
Dependent variable: | |
mu2_hat | |
mu2_hat_1 | 0.33706^{***} (0.03595) |
Constant | 2.94743^{***} (0.44023) |
Observations | 688 |
R^{2} | 0.11361 |
Adjusted R^{2} | 0.11231 |
Residual Std. Error | 10.75907 (df = 686) |
F Statistic | 87.92263^{***} (df = 1; 686) |
Note: | ^{}p<0.1; ^{}p<0.05; ^{}p<0.01 |
Example 13.7:
Effect of Drunk Driving Laws on Traffic FatalitiesWooldridge collected these data from two sources, the 1992 Statistical Abstract of the United States (Tables 1009, 1012) and A Digest of State Alcohol-Highway Safety Related Legislation, 1985 and 1990, published by the U.S. National Highway Traffic Safety Administration. \[\widehat{\Delta{dthrte}} = \beta_0 + \Delta{open} + \Delta{admin}\]
data("traffic1")
?traffic1
<- lm(cdthrte ~ copen + cadmn, data = traffic1) DD_model
Dependent variable: | |
cdthrte | |
copen | -0.41968^{**} (0.20559) |
cadmn | -0.15060 (0.11682) |
Constant | -0.49679^{***} (0.05243) |
Observations | 51 |
R^{2} | 0.11867 |
Adjusted R^{2} | 0.08194 |
Residual Std. Error | 0.34350 (df = 48) |
F Statistic | 3.23144^{**} (df = 2; 48) |
Note: | ^{}p<0.1; ^{}p<0.05; ^{}p<0.01 |
Example 18.8:
FORECASTING THE U.S. UNEMPLOYMENT RATEData from Economic Report of the President, 2004, Tables B-42 and B-64.
data("phillips")
?phillips
\[\widehat{unemp_t} = \beta_0 + \beta_1unem_{t-1}\]
Estimate the linear model in the usual way and note the use of the subset
argument to define data equal to and before the year 1996.
<- subset(phillips, year <= 1996)
phillips_train
<- lm(unem ~ unem_1, data = phillips_train) unem_AR1
\[\widehat{unemp_t} = \beta_0 + \beta_1unem_{t-1} + \beta_2inf_{t-1}\]
<- lm(unem ~ unem_1 + inf_1, data = phillips_train) unem_inf_VAR1
Dependent variable: | ||
unem | ||
(1) | (2) | |
unem_1 | 0.73235^{***} (0.09689) | 0.64703^{***} (0.08381) |
inf_1 | 0.18358^{***} (0.04118) | |
Constant | 1.57174^{***} (0.57712) | 1.30380^{**} (0.48969) |
Observations | 48 | 48 |
R^{2} | 0.55397 | 0.69059 |
Adjusted R^{2} | 0.54427 | 0.67684 |
Residual Std. Error | 1.04857 (df = 46) | 0.88298 (df = 45) |
F Statistic | 57.13184^{***} (df = 1; 46) | 50.21941^{***} (df = 2; 45) |
Note: | ^{}p<0.1; ^{}p<0.05; ^{}p<0.01 |
Now, use the subset
argument to create our testing data set containing observation after 1996. Next, pass the both the model object and the test set to the predict
function for both models. Finally, cbind
or “column bind” both forecasts as well as the year and unemployment rate of the test set.
<- subset(phillips, year >= 1997)
phillips_test
<- predict.lm(unem_AR1, newdata = phillips_test)
AR1_forecast <- predict.lm(unem_inf_VAR1, newdata = phillips_test)
VAR1_forecast
kable(cbind(phillips_test[ ,c("year", "unem")], AR1_forecast, VAR1_forecast))
year | unem | AR1_forecast | VAR1_forecast | |
---|---|---|---|---|
50 | 1997 | 4.9 | 5.526452 | 5.348468 |
51 | 1998 | 4.5 | 5.160275 | 4.896451 |
52 | 1999 | 4.2 | 4.867333 | 4.509137 |
53 | 2000 | 4.0 | 4.647627 | 4.425175 |
54 | 2001 | 4.8 | 4.501157 | 4.516062 |
55 | 2002 | 5.8 | 5.087040 | 4.923537 |
56 | 2003 | 6.0 | 5.819394 | 5.350271 |
This is an excellent open source complimentary text to “Introductory Econometrics” by Jeffrey M. Wooldridge and should be your number one resource. This excerpt from the book’s website:
This book introduces the popular, powerful and free programming language and software package R with a focus on the implementation of standard tools and methods used in econometrics. Unlike other books on similar topics, it does not attempt to provide a self-contained discussion of econometric models and methods. Instead, it builds on the excellent and popular textbook “Introductory Econometrics” by Jeffrey M. Wooldridge.
Hess, Florian. Using R for Introductory Econometrics. ISBN: 978-1-523-28513-6, CreateSpace Independent Publishing Platform, 2016, Dusseldorf, Germany.
From the publisher’s website:
This is the first book on applied econometrics using the R system for statistical computing and graphics. It presents hands-on examples for a wide range of econometric models, from classical linear regression models for cross-section, time series or panel data and the common non-linear models of microeconometrics such as logit, probit and tobit models, to recent semiparametric extensions. In addition, it provides a chapter on programming, including simulations, optimization, and an introduction to R tools enabling reproducible econometric research. An R package accompanying this book, AER, is available from the Comprehensive R Archive Network (CRAN) at https://CRAN.R-project.org/package=AER.
Kleiber, Christian and Achim Zeileis. Applied Econometrics with R. ISBN 978-0-387-77316-2, Springer-Verlag, 2008, New York. https://www.springer.com/us/book/9780387773162
Jeffrey M. Wooldridge (2020). Introductory Econometrics: A Modern Approach, 7th edition. ISBN-13: 978-1-337-55886-0. Mason, Ohio :South-Western Cengage Learning.
Jeffrey A. Ryan and Joshua M. Ulrich (2020). quantmod: Quantitative Financial Modelling Framework. R package version 0.4.18. https://CRAN.R-project.org/package=quantmod
R Core Team (2021). R: A language and environment for statistical computing. R Foundation for Statistical Computing, Vienna, Austria. URL https://www.R-project.org/.
Marek Hlavac (2018). stargazer: Well-Formatted Regression and Summary Statistics Tables. R package version 5.2.2. URL: https://CRAN.R-project.org/package=stargazer
van der Loo M (2020). tinytest “A method for deriving information from running R code.” The R Journal, Accepted for publication. <URL: https://arxiv.org/abs/2002.07472>.
Yihui Xie (2021). knitr: A General-Purpose Package for Dynamic Report Generation in R. R package version 1.33. https://CRAN.R-project.org/package=knitr