Accounting Research Methods
2013/3/31
Introduction: The Nature and Purpose of Econometrics
Continuous and Discrete Data
What is Econometrics? Literal meaning is “measurement in economics”. Definition of financial econometrics: The application of statistical and mathematical techniques to problems in finance and accounting.
Continuous data can take on any value and are not confined to take specific numbers. Discrete data can only take on certain values, which are usually integers
Types of Data
Dummy variable
A dummy variable (also known as indicator variable or just dummy) is one that takes the values 0 or 1 to indicate the absence or presence of some categorical effect that may be expected to shift the outcome. 1 dummy variable for 2 categories 2 dummy variable for 3 categories 3 dummy variable for 4categories ………………….
• There are 3 types of data which econometricians might use for analysis: 1. Time series data 2. Cross-sectional data 3. Panel data, a combination of 1. & 2.
Regression Returns in Financial Modelling
It is preferable not to work directly with asset prices, so we usually convert the raw prices into a series of returns. There are two ways to do this: Simple returns or log returns
Regression is probably the single most important tool What is regression analysis? It is concerned with describing and evaluating the relationship between a given variable (usually called the dependent variable) and one or more other variables (usually known as the independent variable(s)).
pt pt 1 100% pt 1 where, Rt denotes the return at time t pt denotes the asset price at time t ln denotes the natural logarithm Rt
p Rt ln t 100% pt 1
1
2013/3/31
Some Notation
Regression is different from Correlation
Denote the dependent variable by y and the independent variable(s) by x1, x2, ... , xk where there are k independent variables. Some alternative names for the y and x variables: y x dependent variable
Introduction: The Nature and Purpose of Econometrics
Continuous and Discrete Data
What is Econometrics? Literal meaning is “measurement in economics”. Definition of financial econometrics: The application of statistical and mathematical techniques to problems in finance and accounting.
Continuous data can take on any value and are not confined to take specific numbers. Discrete data can only take on certain values, which are usually integers
Types of Data
Dummy variable
A dummy variable (also known as indicator variable or just dummy) is one that takes the values 0 or 1 to indicate the absence or presence of some categorical effect that may be expected to shift the outcome. 1 dummy variable for 2 categories 2 dummy variable for 3 categories 3 dummy variable for 4categories ………………….
• There are 3 types of data which econometricians might use for analysis: 1. Time series data 2. Cross-sectional data 3. Panel data, a combination of 1. & 2.
Regression Returns in Financial Modelling
It is preferable not to work directly with asset prices, so we usually convert the raw prices into a series of returns. There are two ways to do this: Simple returns or log returns
Regression is probably the single most important tool What is regression analysis? It is concerned with describing and evaluating the relationship between a given variable (usually called the dependent variable) and one or more other variables (usually known as the independent variable(s)).
pt pt 1 100% pt 1 where, Rt denotes the return at time t pt denotes the asset price at time t ln denotes the natural logarithm Rt
p Rt ln t 100% pt 1
1
2013/3/31
Some Notation
Regression is different from Correlation
Denote the dependent variable by y and the independent variable(s) by x1, x2, ... , xk where there are k independent variables. Some alternative names for the y and x variables: y x dependent variable