Econometric Methods in Investment Analysis - Project

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Econometric Methods in Investment Analysis

SEQ CHAPTER \h \r 1 Economics is about models and these models are typically articulated in very general terms . Econometric methods give a way to obtain more defined expressions of such models (Charemza , W . W and D . F . Deadman 1997 . Means giving statistical values to concepts like the marginal propensity to consume , the multiplier and so on . It means putting statistical values into the model so that it might be used to make numerical forecasts of key economic

variables that might be used by a policy maker . In to do these things , the economist should confront the theory with data , an undertaking that it is plagued with difficulties

Econometric conjecture is only as reliable as the fundamental statistical assumptions (Dickey , D . A , D . W . Jansen and D . L . Thornton 1991 . The necessary assumptions concern specific distributional properties of the errors in the linked econometric model . Such errors obtain little attention from economic theorists and are added reluctantly at the end of econometric models . However , it is the proper pattern of these error distributions , together with the exact structure of the interdependence that permits our empirical economic inferences The need of correctly stating the basic statistical model is always at issue in real econometric applications . Questions of proper specification affect the interpretation of any empirical economic evidence

No better statement of the meaning and significance of this new type of cycle investigation can be given than that made by Ragnar Frisch in an editorial of the first issue of Econometrica in January 1933 "Thus , econometrics is by no means the same as economic statistics . Nor is it identical with what we call general economic theory , although a considerable portion of this theory has a definitely quantitative character . Nor should econometrics be taken as synonymous with the application of mathematics to economics . Experience has shown that each of these three viewpoints that of statistics , economic theory , and mathematics , is a necessary , but not by itself a sufficient , conditions for a real understanding of the quantitative relations in modern economic life . It is the unification of all three that is powerful . And it is this unification that constitutes econometrics

Econometric business-cycle research is enormously determined in its aims , and if successful would is , though , a long-run ideal , for so bold a program cannot be effectively carried out directly in view of the complexity of the problem and the unacceptable character of the existing statistics . If the results achieved thus far are somewhat inadequate , it should be remembered that the work has progressed for barely twenty years , which is short compared with the lifetime of general economics (Enders , W 1995 . To this might be added the deliberation that the errors and shortcomings of econometrics appear more conspicuous by virtue of the fact that all imprecision or indecisiveness is constantly eschewed

Econometric techniques are simply as good as the precision of the assumptions upon which they are based . An explicit statistical test or...