Econometric theory

The importance of the econometric theory

The importance of econometrics in today’s financial system is well-known, yet numerous investors throughout the world lack the knowledge needed to apply theories and various methods into real-life scenarios, to help build economic forecasts, and determine whether certain business decisions are smart.

In this article, we will discuss about the concept of econometric theory, alongside with the main methods being applied in the real market. With this in mind, the theory uses a statistical theory, meant to develop and evaluate various methods. Econometricians are known for finding estimators that come along with desirable properties in terms of statistics, but which are also efficient, unbiased and provide the evaluators with consistency on the results.

At this moment in time, while econometrics may still use a couple of standard statistical methods in order to study economic questions, most of the times, observational data is used instead. However, controlled experiments have been proven to yield somewhat better results. Currently, the data coming from an observational study is guided by a couple of aspects, including the study protocol, but also exploratory data which is sometimes used by econometricians to generate new hypotheses. They often tend to analyse the actual systems of inequalities and equations (supply and demand), but also simultaneous-equation methods, estimations and identifications of current issues. Other methods such as system analysis and identification alongside with the control theory do allow researchers to investigate the empirical consequences of certain models without having to resort to the process of manipulating the actual systems. This is where simulation and the generalized method of moments come in, as these two processes have been proven to yield more exact results, while also emphasizing more on the practical aspects of econometrics.

Based on everything that has been outlined so far, in the real world use, the influence of the econometric theory cannot be felt by anyone, yet further investigation will show that it is indeed, fairly prominent and stands at the base of current economic decisions and forecasting.

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