# Financial Econometrics

Course ID
FC 403
Level
Program
BBA (FIA)
Semester
Fourth
Credits
6.0
Paper Type
Core Course
Method
Lecture & Tutorial

## Unique Paper Code: 61011403

This course provides a comprehensive introduction to basic econometric concepts and techniques. It covers estimation and diagnostic testing of simple, multiple regression models, panel data models, and dummy variable regression with qualitative response regression models.

## Learning Outcomes:

At the end of the course, students should be able to:

• Understanding of basic econometrics and its assumptions and impact of violations of classical assumptions
• Interpretation of functional forms of regression model
• Understanding of Panel data regression models, stochastic regressors and the method of instrumental variables
• Understanding of models using dummy variable and Qualitative Response Regression Models.

## Course Contents

Unit I
Unit II
Unit III
Unit IV

Unit I (2 weeks)

Introduction to Econometrics and an overview of its applications; Simple Regression with Classical Assumptions; Least Square Estimation And BLUE, Properties of estimators, Multiple Regression Model and Hypothesis Testing Related to Parameters – Simple and Joint. Functional forms of regression models.

References:

Gujarati, N. Damodar. Basic Econometrics. New Delhi: McGraw Hill. [ Chapter 1-9]

Gujarati, N. Damodar. Econometrics by Examples. New Delhi: McGraw Hill. [Chapter1-3]

Unit II (4 weeks)

Violations of Classical Assumptions: multicollinearity, heteroscedasticity, autocorrelation and model specification errors, their identification, their impact on parameters; tests related to parameters and impact on the reliability and the validity of inferences in case of violations of Assumptions; methods to take care of violations of assumptions, goodness of fit.

Time Series econometrics: stationary stochastic processes, nonstationary Stochastic Processes, unit root stochastic processes, trend Stationary and difference Stationary stochastic processes. Tests of stationarity- graphical analysis and autocorrelation function (ACF) and correlogram statistical significance of autocorrelation coefficients. The unit root test – the augmented dickey-fuller (ADF) test. Transforming nonstationary financial time series – difference stationary processes and trend- Stationary process

References:

Gujarati, N. Damodar. Basic Econometrics. New Delhi: McGraw Hill. [Chapter 10-13 and 21-22]

Gujarati, N. Damodar. Econometrics by Examples. New Delhi: McGraw Hill. [Chapter 4-7 and 13]

Unit III (3 weeks)

Panel data regression models – the importance of panel data, Pooled OLS regression of charity function, the fixed effects least squares dummy variable (LSDV) model, Limitations of the fixed effects LSDV model, the fixed effect within group (WG) estimator, the random effects model (REM) or error components model (ECM), fixed effects model vs. random effects model and properties of various estimators. Stochastic regressors and the method of instrumental variables- the problem of endogeneity, the problem with stochastic regressors, reasons for correlation between regressors and the error term and the method of instrumental variables (2SLS).

References:

Gujarati, N. Damodar. Basic Econometrics. New Delhi: McGraw Hill. [Chapter 16]

Gujarati, N. Damodar. Econometrics by Examples. New Delhi: McGraw Hill. [17 and 19]

Unit IV (3 weeks)

Dummy variables: Intercept dummy variables, slope dummy variables, Interactive dummy variables, Use of Dummy Variables to model qualitative/Binary/Structural changes, Other Functional Forms, Qualitative Response Regression Models or Regression Models with Limited Dependent Variables – Use of Logit, and Probit Models

Recommendation Computer Package to be Used: Use of software like E Views, R and STATA solving real life problems and checking assumptions and taking care of assumptions violations and testing goodness of fit, Panel data regression models. And used in Logit, and Probit Models.

References:

Gujarati, N. Damodar. Basic Econometrics. New Delhi: McGraw Hill. [Chapter 9 and 15]

Gujarati, N. Damodar. Econometrics by Examples. New Delhi: McGraw Hill. [3 and 8]

#### Text Books

Christopher Dougherty. Introductory Econometrics. Oxford University Press.
Gujarati, N. Damodar. Basic Econometrics. New Delhi: McGraw Hill.
Gujarati, N. Damodar. Econometrics by Examples. New Delhi: McGraw Hill.

Pindyck, Robert S. and Daniel L. Rubinfeld Econometric Models and Economic Forecasts. Singapore: McGraw Hill.
Ramanathan, Ramu (2002). Introductory Econometrics with Applications (5th ed.). Thomson South Western

#### Teaching Learning Process

Lecture, Solving of numerical problems, discussion and PowerPoint presentations.

#### Assessment Methods

• Internal Assessment: 25 marks
• Written Theory Exam: 75 marks

#### Keywords

Simple Regression, Autocorrelation function, Unit root test, random effects model, Panel data regression models, Logit

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