Applied Econometrics For Economics And Finance

Quantitative AssignmentMAE306-Applied Econometrics For Economics And FinanceInstructions: This is an individual assignment. All quantitative work/calculations in E-Views must be attached as an appendix. The E-Views workfile based on which all work/calculations are generated needs to be submitted with the assignment document as well. Enjoy! [Word limit: 2,000 to 2,500 words]1. Refer to the assignment dataset posted in CloudDeakin. A model to estimate the effects of smoking on annual income (perhaps through lost work days due to illness, or productivity effects) iswhere cigs is number of cigarettes smoked per day, educ denotes years of education, age is years of age and age2 is the square of age.Report the descriptive statistics and graphs for the above variables listed in the equation. Make some brief comments on those statistics and graphical illustrations.Afterwards, estimate the above model using OLS. Discuss (check for the help you need) the estimate of . How do you interpret other coefficients in the equation?2. In the dataset, white stands for white people in the sample. Does any of your above result change if you include white in the above regression model?3. Do you think there may be problem of heteroskedasticity? Justify your answer after checking the following three: (a) residual plots, (b) LM test and (c) White test.4. Would there be any problem of autocorrelation? Explain your answer with (i) residual correlogram and (ii) LM test.5. To reflect the fact that cigarette consumption might be jointly determined with income, a demand for cigarettes equation iswhere, cigpric is the price of a pack of cigarettes (in cents), and restaurn is a binary variable equal to unity if the person lives in a state with restaurant smoking restrictions. Assuming these are exogenous to the individual, what signs would you expect for and ?6. Under what assumption is the income equation from part (1) identified?7. Estimate the reduced form for cigs. Are potential IVs, log(cigpirc) and restaurn significant in the reduced form?8. Check for endogeneity using Hausman test. What would you conclude?9. Check for relevance of instruments. What is your conclusion?10. Check for instrument validity. What would you conclude?11. Now, estimate the income equation by 2SLS. Discuss (check for the help you need) how the estimate of compares with the OLS estimate.12. Do you think that cigarette prices and restaurant smoking restrictions are exogenous in the income equation?

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