Consider the investment behavior of two large corporations, General Electric and Westinghouse. These firms compete against each other and produce many of the same types of products. We might wonder if they have similar investment strategies. Investment data for 20 years for these two corporations are stored in file Inv.wf1. For each variable, the first 20 observations relates to General Electric and the last 20 observations relates to Westinghouse. The variables, for each firm, are
INV = gross investment in plant and equipment
V = value of the firm = value of common and preferred stock
K = stock of capital
A simple investment function is
INV = β1 + β2V + β3K + e (1)
If we combine, or pool, the data for both firms, we have T = 40 observations with which to estimate the parameters of the investment function. But pooling the two sources of data is valid only if the regression parameters and the variances of the error terms are the same for both corporations. If these parameters are not the same, and we combine the data sets anyway, it is equivalent to restricting the investment function
A Modelling the Investment function for two firms.
Westinghouse observations, and 0 otherwise) by including the intercept indicator variable and a complete set of slope indicator variable,
INV = β1 + δ1D + β2V + δ2 (D*V) + β3K + δ3 (D*K) + e,
and the Chow test, test whether the investment function for the two firms are identical.
B Investigating whether the Error Variances for the two firms are the same.
Compare the two sets of estimates and their standard errors.
The question belongs to Statistics and it discusses about calculation of variance and estimate standard errors.
Total Word Count 824Download Full Solution
If you are here for the first time, you can request for a discount coupon, which can knock off upto 20% of the quoted price on any service.