Question

Briefly explain the concepts below:

1. / Spurious regression

(5 markah/marks)

2. / Distributed lag model

(5 markah/marks)

3. / Fixed effect panel model

(5 markah/marks)

4. /Static model

(5 markah/marks)

5. / Unit root

(5 markah/marks)

Answer 1

i.

Spurious Regression is a statistical problem in econometrics analysis. It says that both dependent variable and independent variables have a positive trend in their estimation which gives misleading results. Due to this problem, the model results give high coefficient of determination value and significant t-ratios. It also known as non-sense regression.

ii.

Distributed Lag Model:

Lag means the past values. When the model includes the current as well as the past values of the explanatory variables, then the model is called Distributed Lag Model. These models suffer from the high risk of multicollinearity between the explanatory variables.

iii.

Fixed effect panel model

Under this model, the model parameters are fixed and are not random. Group means in the sample drawn from population is fixed and does not vary. We include a separate intercept that takes into account the heterogeneities across the observations in the sample.

iv. Static Model:

These models are the time series models under which current value of one variable is modeled as the result of current values of explanatory variable. All variables are designated in time.

v.

Unit Root:

Unit Root is the issue in time series data that researcher tries to reduce. A time series data is said to have a unit root when when the observations show a systematic patter which is not predictable. It is also known as Random Walk or a stochastic trend.