A Guide to Econometrics (6th Edition) Edit edition

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Monte Carlo simulation is a technique in econometrics that is used to study the effect of uncertainty and risk in cost, finances, project management, and other various forecasting models. It is also called probability simulation.

a) The given computer simulation exercise is a Monte Carlo study designed to investigate the properties of sampling distribution of a slope estimate with the help of hypothetical data where we have used 500 sets of 25 random variables.

b) The average of a random normal distribution is calculated as follows:

is the average of 25 random normal distribution values with mean 0 and standard deviation 1. Each of the 25 random value is first multiplied by 3 and then added by 2. Therefore, it will be calculated as

Where, is close to 0, since mean is 0. Therefore, will be close to 2. The average of 500 such averages, , will be calculated as

Since is close to 2, the value of will be close to 2.

c) The variance of a random normal distribution is calculated as follows:

The variance of the 500 averages ( to ) calculated in (b) above will be calculated as

Since and are both close to 2, the value of should be close to 0.