# Financial Econometric Problems Harvard Case Solution & Analysis

## Financial Econometric Problem Case Solution

Part 2

Question 1

Estimation of Panel Time Varying Co-efficient Model

By using the model of TVP, it concludes the changes in the regional mobility of China during the economic reform from 1798 till 2008. Moreover, model fits to the economic condition of China. It shows the improvement over the period but during the period, it declined from 1994 till 1997. Due to high inflation, the capital’s mobility worsened
Region (Downward Trend)
i. Region 1: (Beijing, Tianjin, Hebai)
ii. Region 4: (Shanghai, Jiangsu, Zhejiang)
iii. Region 7: (Guangdong, Fujian)
iv. Region 8: (Guangxi, Yunnan)
v. Region 9: (Shanxi, Xinjiang, Inner Mongolia)
Region (Upward Trend)
i. Region 5: (Hunan)
ii. Region 6 (Henan Anhui)
iii. Region 2: (Shanxi and Shandong)
iv. Region 3 (Liaoning, Jilin, Heilongjiang)
Overall capital Mobility in China
Decreasing Trend
Improvement in capital mobility
Increasing Trend
Worsening in capital mobility

Panel A: Whole time period 1978-2008
F value Interpretation
The F ratio is the proportion of two mean square values. If the invalid hypothesis is genuine, then it can be expected that F will have a value near 1.0 more than often. A large F ratio implies that the variety among gathering means is more than one would hope to see by chance.
F values: 2.82 (0.006) 2.1 (0.08)
It indicates large F ratio, which means that the variation among the group means is more than one would expect to see by chance.

Lambda Interpretation

The mean and median of estimated lambda has a downward trend from 1994, which increased until 1997. Afterwards it deteriorated in 1997. The fluctuation of capital mobility prior to 1997 could be due to the increase in the inflation rate in China. Hence, this implements the government policies that result in the reduction of investment.
The coefficient lambda represents the coefficient of the net income growth (x in the equation) to consumption growth, which indicates that consumption growth highly depends on the net income and earnings, which later emphasizes and targets the spending in order to mobilize the improvement in China..................

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