International Edition Econometric Analysis

1 The editorial team at Pearson has worked closely witheducators around the globe to inform students of the ever-changing world in a broad variety of Education offers this product to theinternational market, which may or may not includealterations from the United States version. InternationalEditionInternational EditionThis is a special Edition of an established titlewidely used by colleges and universitiesthroughout the world. Pearson published thisexclusive Edition for the benefit of studentsoutside the United States and Canada. If youpurchased this book within the United Statesor Canada you should be aware that it hasbeen imported without the approval of thePublisher or the International Edition GreeneEconometric AnalysisInternational EditionSeventh EditionEconometricAnalysisSeventh EditionWilliam H. GreeneGreene-2140242A01 GREE3568 07 GE FMJanuary 19, 201120:15 SEVENTH EDITIONECONOMETRIC ANALYSISINTERNATIONAL EDITIONQW illiam H.

2 GreeneNew York UniversityGreene-2140242A01 GREE3568 07 GE FMFebruary 16, 201115:22 For Margaret and Richard GreeneEditorial Director:Sally YaganSenior Manufacturing Buyer:Carol MelvilleEditor in Chief:Donna BattistaCreative Director:Christy MahonAcquisitions Editor:Adrienne D AmbrosioCover Designer:Jodi NotowitzSenior International Acquisitions Editor:Cover Image:Robert Adrian Hillman/AlamyLaura DentPermissions Project Supervisor:Michael JoyceEditorial Project Manager:Jill KolongowskiMedia Producer:Melissa HonigDirector of Marketing:Patrice JonesAssociate Production Project Manager:Senior Marketing Manager:Lori DeShazoAlison EusdenInternational Marketing Manager:Dean ErasmusFull-Service Project Management:Managing Editor:Nancy FentonMPS Limited, a Macmillan CompanyProduction Project Manager:Carla ThompsonCover Printer:Lehigh-PhoenixManufacturing Director:Evelyn BeatonColor/HagerstownPearson Education LimitedEdinburgh Gate, HarlowEssex CM20 2JE, Englandand Associated Companies throughout the worldVisit us on the World Wide Web Pearson Education Limited 2012 The right of William H.

3 Greene to be identified as author of this work has been asserted by him inaccordance with the Copyright, Designs and Patents Act adaptation from the United States Edition , entitled Econometric Analysis ,ISBN 978-0-13-139538-1 by William H. Greene published by Pearson Education, publishing asPrentice Hall rights reserved. No part of this publication may be reproduced, stored in a retrieval system, ortransmitted in any form or by any means, electronic, mechanical, photocopying, recording orotherwise, without either the prior written permission of the publisher or a licence permittingrestricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, SaffronHouse, 6 10 Kirby Street, London EC1N trademarks used herein are the property of their respective owners. The use of any trademark inthis text does not vest in the author or publisher any trademark ownership rights in such trademarks,nor does the use of such trademarks imply any affiliation with or endorsement of this book by and acknowledgements borrowed from other sources and reproduced, with permission, in thistextbook appear on an appropriate page within 13: 978-0-273-75356-8 ISBN 10: 0-273-75356-8 British Library Cataloguing-in-Publication DataA catalogue record for this book is available from the British Library1098765432115 14 13 12 11 Typeset in 10/12 Times by MPS Limited, a Macmillan and bound by Courier/Westford in The United States of AmericaThe publisher s policy is to use paper manufactured from sustainable GREE3568 07 GE FMFebruary 8, 201121.

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7 15 BRIEF CONTENTSQE xamples and Applications25 Preface33 Part IThe Linear Regression ModelChapter 1 Econometrics41 Chapter 2 The Linear Regression Model51 Chapter 3 Least Squares66 Chapter 4 The Least Squares Estimator91 Chapter 5 Hypothesis Tests and Model Selection148 Chapter 6 Functional Form and Structural Change189 Chapter 7 Nonlinear, Semiparametric, and NonparametricRegression Models221 Chapter 8 Endogeneity and Instrumental Variable Estimation259 Part IIGeneralized Regression Model and Equation SystemsChapter 9 The Generalized Regression Model and Heteroscedasticity297 Chapter 10 Systems of Equations330 Chapter 11 Models for Panel Data383 Part IIIE stimation MethodologyChapter 12 Estimation Frameworks in Econometrics472 Chapter 13 Minimum Distance Estimation and the GeneralizedMethod of Moments495 Chapter 14 Maximum Likelihood Estimation549 Chapter 15 Simulation-Based Estimation and Inference and RandomParameter Models643 Chapter 16 Bayesian Estimation and Inference695 Part IVCross Sections, Panel Data, and MicroeconometricsChapter 17 Discrete Choice721 Chapter 18 Discrete Choices and Event Counts800 Chapter 19 Limited Dependent Variables Truncation, Censoring,and Sample Selection8734 Greene-2140242A01 GREE3568 07 GE FMJune 1, 201115.

8 23 Brief Contents5 Part VTime Series and MacroeconometricsChapter 20 Serial Correlation943 Chapter 21 Nonstationary Data982 Part VIAppendicesAppendix A Matrix Algebra1013 Appendix B Probability and Distribution Theory1055 Appendix C Estimation and Inference1087 Appendix D Large-Sample Distribution Theory1106 Appendix E Computation and Optimization1129 Appendix F Data Sets Used in Applications1149 References1155 Combined Author and Subject Index1211 Greene-2140242A01 GREE3568 07 GE FMJanuary 19, 201120:15 CONTENTSQE xamples and Applications25 Preface33 PART I The Linear Regression ModelCHAPTER Paradigm of Practice of of the Examples and Replication Conventions 49 CHAPTER 2 The Linear Regression Linear Regression of the Linear Regression of the Regression Model Rank Disturbances Generating Process for the Regressors and Conclusions65 CHAPTER 3 Least Squares Least Squares Coefficient Vector 676 Greene-2140242A01 GREE3568 07 GE FMJanuary 19, 201120.

9 An Investment Equation Aspects of the Least Squares Solution Regression and Partial Regression and Partial Correlation of Fit and the Analysis of Adjusted R-Squared and a Measure of Fit and the Constant Term in the Model Models Transformed and Conclusions87 CHAPTER 4 The Least Squares Least Population Orthogonality Conditions Mean Squared Error Predictor Variance Linear Unbiased Estimation Sample Properties of Least Estimation Caused by Omission of Relevant Variables of Irrelevant Variables Variance of the Least Squares Estimator Gauss Markov Theorem Implications of Stochastic Regressors the Variance of the Least Squares Estimator Normality Assumption Sample Properties of the Least Squares of the Least Squares Estimator of Normality of the Least Squares Estimator of s2and the Estimator of Asy. Var[b] Distribution of a Function ofb: The DeltaMethod Efficiency Likelihood Estimation a Confidence Interval for a Coefficient Intervals Based on Large Samples Interval for a Linear Combination of Coefficients:The Oaxaca Decomposition and Intervals the Regression Model Describes Logy121 Greene-2140242A01 GREE3568 07 GE FMJanuary 19, 201120 Interval foryWhen the Regression Model Estimation Components Values and Data Imputation Error and Influential Observations and Conclusions142 CHAPTER 5 Hypothesis Tests and Model Testing and Hypotheses Models Procedures Neyman Pearson Methodology , Power, and Consistency of a Test Methodological Dilemma.

10 Bayesian versus Classical Approaches to Testing Tests Based on the Distance a Hypothesis about a Coefficient F Statistic and the Least Squares Discrepancy Restrictions Using the Fit of the Restricted Least Squares Estimator Loss of Fit from Restricted Least the Significance of the Regression Out the Restrictions and a Caution aboutUsing Disturbances and Large-Sample Nonlinear between Nonnested Nonnested Hypotheses Encompassing Model Approach The J Test Specification Building A General to Simple Selection Criteria Selection Model Selection Model Averaging and Conclusions183 Greene-2140242A01 GREE3568 07 GE FMJanuary 19, 201120:15 Contents9 CHAPTER 6 Functional Form and Structural Binary Variables in Regression Categories Groupings Effects and Categorical Variables Effects and Differences in DifferencesRegression in the Linear Regression Forms Effects Nonlinearity Linear Models and Testing for a Structural Parameter Vectors Observations in a Subset of Coefficients of Structural Break with Unequal Variances Test of Model Stability and Conclusions215 CHAPTER 7 Nonlinear, Semiparametric.