Marno Verbeek - A Guide to Modern Econometrics

Table of Contents

This edition first published 2012

Copyright 2012 John Wiley & Sons Ltd.

First edition published 2000, second edition published 2004, third edition published 2008 all by John Wiley & Sons, Ltd.

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Library of Congress Cataloging-in-Publication Data

Verbeek, Marno.

A guide to modern econometrics/Marno Verbeek. 4th ed.

p. cm.

Includes bibliographical references and index.

ISBN 978-1-119-95167-4 (cloth)

1. Econometrics. 2. Regression analysis. I. Title.

HB139.V465 2012

330.015195dc23

2011038159

A catalogue record for this book is available from the British Library.

Emperor Joseph II: Your work is ingenious. It's quality work. And there are simply too many notes, that's all. Just cut a few and it will be perfect.

Wolfgang Amadeus Mozart: Which few did you have in mind, Majesty?

from the movie Amadeus, 1984 (directed by Milos Forman)

The field of econometrics has developed rapidly in the last three decades, while the use of up-to-date econometric techniques has become more and more standard practice in empirical work in many fields of economics. Typical topics include unit root tests, cointegration, estimation by the generalized method of moments, heteroskedasticity and autocorrelation consistent standard errors, modelling conditional heteroskedasticity, models based on panel data, models with limited dependent variables, endogenous regressors and sample selection. At the same time econometrics software has become more and more user friendly and up-to-date. As a consequence, users are able to implement fairly advanced techniques even without a basic understanding of the underlying theory and without realizing potential drawbacks or dangers. In contrast, many introductory econometrics textbooks pay a disproportionate amount of attention to the standard linear regression model under the strongest set of assumptions. Needless to say that these assumptions are hardly satisfied in practice (but not really needed either). On the other hand, the more advanced econometrics textbooks are often too technical or too detailed for the average economist to grasp the essential ideas and to extract the information that is needed. This book tries to fill this gap.

The goal of this book is to familiarize the reader with a wide range of topics in modern econometrics, focusing on what is important for doing and understanding empirical work. This means that the text is a guide to (rather than an overview of) alternative techniques. Consequently, it does not concentrate on the formulae behind each technique (although the necessary ones are given) nor on formal proofs, but on the intuition behind the approaches and their practical relevance. The book covers a wide range of topics that is usually not found in textbooks at this level. In particular, attention is paid to cointegration, the generalized method of moments, models with limited dependent variables and panel data models. As a result, the book discusses developments in time series analysis, cross-sectional methods as well as panel data modelling. Throughout, a few dozen full-scale empirical examples and illustrations are provided, taken from fields like labour economics, finance, international economics, consumer behaviour, environmental economics and macro-economics. In addition, a number of exercises are of an empirical nature and require the use of actual data.

In this fourth edition, I have tried to further fine-tune and update the text, adding additional discussion and material. To prevent the manuscript from growing too long, I have substantially increased the number of references to other sources, for additional detail, discussion, derivations or recent developments. The overall structure and organization of the material have not changed, so that users of the first three editions will feel familiar. A number of empirical illustrations have been replaced or updated. Chapter 2 contains a new section on missing data, outliers and influential observations, with an intuitive discussion of the potential problems and solutions. Chapter 3 has additional material on forecast evaluation, in the context of the empirical illustration on forecasting stock returns. Chapter 4 has been shortened by eliminating some outdated material. The literature on the estimation of treatment effects has evolved over the past decade and this is reflected in an expanded and updated section in Chapter 7. The two time series chapters, Chapters 8 and 9, have a number of updated illustrations. Chapter 10 is also expanded with additional material on the FamaMacBeth approach, the problem of having too many instruments when estimating dynamic panel data models, and on panel data unit root tests and cointegration. Several chapters contain new exercises and each chapter is now concluded with a short wrap-up section. Overall, there is more focus on small sample properties of estimators and tests, with additional references to, for example, Monte Carlo studies that look into this. As before, all data sets are available through the book's website.

This text originates from lecture notes used for courses in Applied Econometrics in the M.Sc. programmes in Economics at K. U. Leuven and Tilburg University. It is written for an intended audience of economists and economics students that would like to become familiar with up-to-date econometric approaches and techniques, important for doing, understanding and evaluating empirical work. It is very well suited for courses in applied econometrics at the masters or graduate level. At some schools this book will be suited for one or more courses at the undergraduate level, provided students have a sufficient background in statistics. Some of the later chapters can be used in more advanced courses covering particular topics, for example, panel data, limited dependent variable models or time series analysis. In addition, this book can serve as a guide for managers, research economists and practitioners who want to update their insufficient or outdated knowledge of econometrics. Throughout, the use of matrix algebra is limited.