Introduction To Econometrics (3 Updated Edition, Global Edition)

Introduction
to Econometrics
(3rd Updated Edition, Global Edition)
by
James H. Stock and Mark W. Watson
Solutions to Odd-Numbered End-of-Chapter Exercises:

Chapter 5
(This version August 17, 2014)
©2015 Pearson Education, Ltd.

Stock/Watson - Introduction to Econometrics - 3rd Updated Edition - Answers to Exercises: Chapter 5 1
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5.1 (a) The 95% confidence interval for β1 is [–4.93 ± 1.96 × 2.02], that is –8.889 ≤ β1 ≤ –0.9708.
(b) Calculate the t-statistic:
β̂1 − 0 −4.93
t= = = − 2.3702
SE ( β̂1 ) 2.08
The p-value for the test H0: β1 = 0 against the alternative β1 ≠ 0 is
p -value = 2Φ(− | t |) = 2Φ(−2.3707) = 2 × (0.0043) = 0.0086
The p-value is less than 0.01, so we can reject the null hypothesis at the 5% significance level,
and also at the 1% significance level.
(c) The t-statistic is
β̂1 − (−5.0) −0.07
t= = = −0.0347
SE ( β̂1 ) 2.02
The p-value for the test H0: β1 = –5.0 against the alternative β1 ≠ 5.0 is
p -value = 2Φ(− | t |) = 2Φ(−0.0347) = 2 × (0.486) = 0.972
The p-value is larger than 0.10, so we cannot reject the null hypothesis at the 10%, 5% or
1% significance level. Because β1 = –5.0 is not rejected at the 5% level, this value is
contained in the 95% confidence interval.
(d) The 90% confidence interval for β0 is [640.3 ± 1.65 × 23.5], that is 601.525 ≤ β0 ≤ 679.075.

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5.3. The 95% confidence interval is 2 × [4.16 ± 1.96 × 0.42], that is 6.67 ≤ Weight gain ≤ 9.97 lbs.

_____________________________________________________________________________________________________
5. 5 (a) The estimated gain from being in a small class is 13.9 points. This is equal to
approximately 1/5 of the standard deviation in test scores, a moderate increase.
(b) The t-statistic is t act = 13.9

2.5 = 5.56,
which has a p-value of 0.00. Thus the null
hypothesis is rejected at the 5% (and 1%) level.
(c) 13.9 ± 2.58 × 2.5 = 13.9 ± 6.45.

_____________________________________________________________________________________________________
5.7. (a) The t-statistic is 3.2

1.5 = 2.13 with a p-value of 0.03; since the p-value is less than
0.05, the null hypothesis is rejected at the 5% level.
(b) 3.2 ± 1.96 × 1.5 = 3.2 ± 2.94
(c) Yes. If Y and X are independent, then β1 = 0; but this null hypothesis was rejected
at the 5% level in part (a).
(d) β1 would be rejected at the 5% level in 5% of the samples; 95% of the

confidence intervals would contain the value β1 = 0.

_____________________________________________________________________________________________________
1
(Y1 + Y2 +!+ Yn )
5.9. (a) β = n
so that it is linear function of Y1, Y2, …, Yn.
X
(b) E(Yi|X1, …, Xn) = β1Xi, thus
1 1
E( β |X 1 ,…, X n ) = E (Y + Y +!+ Yn )|X 1 ,…, X n )
X n 1 2
1 1
= β ( X +!+ X n ) = β1
X n 1 1

_____________________________________________________________________________________________________
s
5.11. Using the results from 5.10, ˆ0  Ym and ˆ1  Yw  Ym . From Chapter 3, SE (Ym )  m and
nm
sm2 sw2
SE (Yw  Ym )   . Plugging in the numbers,
nm nw
=βˆ0 $565.89
= and SE(βˆ0 ) $7.65; βˆ1 =
−$63.52 and SE(βˆ1 ) =
$8.73.

_____________________________________________________________________________________________________
5.13. (a) Yes, this follows from the assumptions in KC 4.3.
(b) Yes, this follows from the assumptions in KC 4.3 and conditional
homoskedasticity
(c) They would be unchanged for the reasons specified in the answers to those
questions.
(d) (a) is unchanged; (b) is no longer true as the errors are not conditionally
homosckesdastic.

_____________________________________________________________________________________________________
5.15. Because the samples are independent, βˆm ,1 and βˆw,1 are independent. Thus
var ( βˆm,1 − βˆw,1 ) = var ( βˆm,1 ) + var( βˆw,1 ). Var ( βˆm,1 ) is consistently estimated as
[ SE ( βˆm,1 )]2 and Var (βˆw,1 ) is consistently estimated as [ SE ( βˆw,1 )]2 , so that
var( βˆm,1 − βˆw,1 ) is consistently estimated by [ SE ( βˆm,1 )]2 + [ SE ( βˆw,1 )]2 , and the result
follows by noting the SE is the square root of the estimated variance.

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Introduction

James H. Stock and Mark W. Watson

Solutions to Odd-Numbered End-of-Chapter Exercises:

©2015 Pearson Education, Ltd.

©2015 Pearson Education, Ltd.

©2015 Pearson Education, Ltd.

(b) The t-statistic is t act = 13.9

(c) 13.9 ± 2.58 × 2.5 = 13.9 ± 6.45.

©2015 Pearson Education, Ltd.

5.7. (a) The t-statistic is 3.2

(b) 3.2 ± 1.96 × 1.5 = 3.2 ± 2.94

(d) β1 would be rejected at the 5% level in 5% of the samples; 95% of the

©2015 Pearson Education, Ltd.

(b) E(Yi|X1, …, Xn) = β1Xi, thus

©2015 Pearson Education, Ltd.

©2015 Pearson Education, Ltd.

5.13. (a) Yes, this follows from the assumptions in KC 4.3.

©2015 Pearson Education, Ltd.

©2015 Pearson Education, Ltd.

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