This document presents the results of two regression models analyzing factors that influence the demand for roses and carnations. It also analyzes investment strategies of two large corporations using a pooled time series regression model. The document tests for issues like multicollinearity, significance of variables, and appropriateness of pooling the data between the two firms.
This document presents the results of two regression models analyzing factors that influence the demand for roses and carnations. It also analyzes investment strategies of two large corporations using a pooled time series regression model. The document tests for issues like multicollinearity, significance of variables, and appropriateness of pooling the data between the two firms.
This document presents the results of two regression models analyzing factors that influence the demand for roses and carnations. It also analyzes investment strategies of two large corporations using a pooled time series regression model. The document tests for issues like multicollinearity, significance of variables, and appropriateness of pooling the data between the two firms.
This document presents the results of two regression models analyzing factors that influence the demand for roses and carnations. It also analyzes investment strategies of two large corporations using a pooled time series regression model. The document tests for issues like multicollinearity, significance of variables, and appropriateness of pooling the data between the two firms.
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PROBLEM 1
The demand for roses was estimated using quarterly figures for the period 1971 (3rd quarter) to 1975 (2nd quarter). Two models were estimated, and the following results were obtained:
Y = Quantity of roses sold (dozens)
X 2 = Average wholesale price of roses ($ per dozen) X 3 = Average wholesale price of carnations ($ per dozen) X 4 = Average weekly family disposable income ($ per week) X 5 = Time (1971.3 = 1 and 1975.2 = 16): ln = natural logarithm The standard errors are given in parentheses. Model A ln^ Y t=^ β 1+ ^ β2 ln X 2 t + ^ β3 ln X 3 t + ^ β 4 ln X 4 t + ^ β5 X5t ^ ln Y t =0.627−1.273 ln X 2 t + 0.937 ln X 3 t +1.713 ln X 4 t −0.182 X 5 t ( 0.327 )( 0.659 ) (1.201)(0.128) 2 R =77.8 % D .W .=1.78 n=16 Model B ln^ Y t =α^1+ α^2 ln X 2 t ^ ln Y t =10.462−1.39 ln X 2t (0.307) 2 R =59.5 % D .W .=1.495 n=16
Correlation matrix: ln X 2 ln X 3 ln X 4 X5 ln X 2 1.0000 −.7219 .3160 −.7792 ln X 3 −.7219 1.0000 −.1716 .5521 ln X 4 .3160 −.1716 1.0000 −.6765 X5 −.7792 .5521 −.6765 1.0000
How would you interpret the coefficients of ln X 2, ln X 3 and ln X 4 in model A? What sign would you expect these coefficients to have? Do the results concur with your expectation?
c) Use the results of Model A to test the following hypotheses:
i) The demand for roses is price elastic ii) Carnation is substitute good for rose
iii) Rose is a luxury good (demand increases more than proportionally as income rises)
d) Are the results of (b) and (c) in accordance with your expectations? If any of the tests are statistically insignificant, give a suggestion as to what may be the reason.
e) Do you detect the presence of multicollinearity in the data? Explain.
f) Do the variables lnX 3, ln X 4 and X 5 contribute significantly to the analysis? Test the joint significance of these variables. Hint: Use F test g) Starting from model B, assuming that at the time point of January, 1973, there was a disaster that heavily affected the quantity of roses produced. Suggest a model to check if we have to use two different models for the data before and after the disaster. (Using dummy variable).
lnY =β 1+ β2 × ln X 2+ β3 × D+ β 4∗( X 2∗D)+u
Where D=1 before and D=0 if after. Verify how to check for the differences between 2 period before and after.
PROBLEM 2
Two large US corporations, General Electric and Westinghouse, compete with each other and produce many similar products. To investigate whether they have similar investment strategies, we estimate the following model using pooled time series data for the period 1935 to 1954 for the two firms:
¿ V t =b1 +b 2 D V t +b 3 V t +b 4 ( DV ×V )t + b5 K t +b 6 ( DV × K )t +u t (1)
where INV = gross investment in plant and equipment
V = value of the firm = value of common and preferred stock K = stock of capital DV =0 if General Electric (observations 1 to 20) ¿ 1 if Westinghouse (observations 21 to 40)
All three continuous variables are measured in millions of 1947 dollars. Pooling the data yields 40 observations with which to estimate the parameters of the investment function. However, pooling is valid only if the regression parameters are the same for both firms. In order to test this hypothesis, intercept and slope dummy variables are included in the model.
Dependent Variable: INV; Included observations: 40
Variable Coefficient Std. Error t-Statistic Prob.
C -9.956306 23.62636 -0.421407 0.6761 DV 9.446916 28.80535 0.327957 0.7450 V 0.026551 0.011722 2.265064 0.0300 DV*V 0.026343 0.034353 0.766838 0.4485 K 0.151694 0.019356 7.836865 0.0000 DV*K -0.059287 0.116946 -0.506962 0.6155 R-squared 0.827840 Mean dependent var 72.59075 Adjusted R-squared 0.802523 S.D. dependent var 47.24981 S.E. of regression 20.99707 Akaike info criterion 9.064124 Sum squared resid 14989.82 Schwarz criterion 9.317456 Log likelihood -175.2825 F-statistic 32.69818 Durbin-Watson stat 1.121571 Prob(F-statistic) 0.000000
(a) Interpret all the coefficient estimates, stating whether the signs are as you would expect, and comment on the statistical significance of the individual coefficients. (b) Comment on the overall fit and statistical significance of the model. (c) On the basis of the above results, is pooling the data from the two firms appropriate? Explain. (d) An alternative way of testing whether pooling the data is appropriate, without using dummy variables, is to use the Chow breakpoint test. Referring to table below, briefly discuss how the test works and whether the results are consistent with the earlier model (which includes dummy variables).
Chow Breakpoint Test: 21
F-statistic 1.189433 Probability 0.328351 Log likelihood ratio 3.992003 Probability 0.262329
(e) Explain the results and implications of the following Ramsey RESET test. (Note that the dummy variables have been omitted from the original model). Ramsey RESET Test: F-statistic 0.000200 Probability 0.988806 Log likelihood ratio 0.000219 Probability 0.988189
Test Equation: Dependent Variable: INV Method: Least Squares Date: 05/15/02 Time: 13:07 Sample: 1 40 Included observations: 40 Variable Coefficient Std. Error t-Statistic Prob. C 17.81458 8.199161 2.172732 0.0365 V 0.015226 0.006706 2.270632 0.0293 K 0.144467 0.065596 2.202383 0.0341 FITTED^2 -2.87E-05 0.002028 -0.014128 0.9888 R-squared 0.809773 Mean dependent var 72.59075 Adjusted R-squared 0.793921 S.D. dependent var 47.24981 S.E. of regression 21.44950 Akaike info criterion 9.063919 Sum squared resid 16562.91 Schwarz criterion 9.232807 Log likelihood -177.2784 F-statistic 51.08255 Durbin-Watson stat 1.106556 Prob(F-statistic) 0.000000
(f) What are your conclusions with following results from the above regression
White heteroskedasticity Test:
F-statistic 6.157232 Probability 0.002457 Obs*R-squared 7.869921 Probability 0.005978
Breusch-Godfrey Serial Correlation LM Test:
F-statistic 0.087708 Probability 0.7678 Obs*R-squared 0.090710 Probability 0.7633
