1. Central Bank of Egypt Basic statistics

2. Central Bank of Egypt 2 Index I.Measures of Central Tendency II.Measures of variability of distribution III.Covariance and Correlation IV.Probability distribution V.Shape of Data VI.Testing for normality VII.Basics of Linear Regression VIII.Variation in Linear Regression IX.Linear Regression Analysis X.Matrix Operations

3. Central Bank of Egypt 3 I-Measures of Central Tendency Mean … the average score Median … the value that lies in the middle after ranking all the scores Mode … the most frequently occurring score

4. Central Bank of Egypt 4 II-Variation or Spread of Distributions Measures that indicate the spread of scores: Range Standard Deviation

5. Central Bank of Egypt 5 II-Variation or Spread of Distributions Range: It compares the minimum score with the maximum score Max score – Min score = Range It is a crude indication of the spread of the scores because it does not tell us much about the shape of the distribution and how much the scores vary from the mean

6. Central Bank of Egypt 6 II-Variation or Spread of Distributions Variance – A measure of variation for interval-ratio variables; it is the average of the squared deviations from the mean

7. Central Bank of Egypt 7 II-Variation or Spread of Distributions In order to calculate an unbiased estimate of the population standard deviation, subtract one from the denominator. Sample standard deviation tends to be an underestimation of the population standard deviation. Why n-1?

8. Central Bank of Egypt 8 II-Variation or Spread of Distributions Standard Deviation – A measure of variation for interval- ratio variables; it is equal to the square root of the variance.

9. Central Bank of Egypt III-Covariance and Correlation: Covariance and correlation measure linear association between two variables, say X and Y. Covariance is used to estimate the linear association between X and Y for the population. Covariance:

10. Central Bank of Egypt 10 III-Covariance and Correlation: Let’s first note that, of all the variables a variable may covary with, it will covary with itself most strongly In fact, the “covariance of a variable with itself” is an alternative way to define variance:

11. Central Bank of Egypt 11 Limitation of covariance One limitation of the covariance is that the size of the covariance depends on the variability of the variables. As a consequence, it can be difficult to evaluate the magnitude of the covariation between two variables. –If the amount of variability is small, then the highest possible value of the covariance will also be small. If there is a large amount of variability, the maximum covariance can be large. III-Covariance and Correlation:

12. Central Bank of Egypt 12 III-Covariance and Correlation: Correlation: When expressed this way, the covariance is called a correlation The correlation is defined as a standardized covariance.

13. Central Bank of Egypt III-Covariance and Correlation: Correlation measures the degree of linear association between two variables, say X and Y. There are no units – dividing covariance by the standard deviations eliminates units. Correlation is a pure number. The range is from -1 to +1. If the correlation coefficient is -1, it means perfect negative linear association; +1 means perfect positive linear association. Correlation is used with sample data to estimate the linear association between X and Y for the population.

14. Central Bank of Egypt 14 III-Covariance and Correlation: The value of r can range between -1 and + 1. If r = 0, then there is no correlation between the two variables. If r = 1 (or -1), then there is a perfect positive (or negative) relationship between the two variables.

15. Central Bank of Egypt 15 III-Covariance and Correlation: Advantages and uses of the correlation coefficient –Provides an easy way to quantify the association between two variables –Foundation for many statistical applications

16. Central Bank of Egypt 16 IV-Probability Distributions A statistical distribution is a mathematically-derived probability function that can be used to predict the characteristics of certain applicable real populations Statistical methods based on probability distributions are parametric, since certain assumptions are made about the data

17. Central Bank of Egypt 17 IV-Probability Distributions Binomial distribution: The binomial distribution applies to events that have two possible outcomes. The probability of r successes in n attempts, when the probability of success in any individual attempt is p, is given by:

18. Central Bank of Egypt 18 IV-Probability Distributions Normal distrbution: The most used continuous probability distribution: –Many observations tend to approximately follow this distribution Bell shaped Mean, median and mode are the same Mean and standard deviation specify the curve

19. Central Bank of Egypt 19 IV-Probability Distributions X f(X)   Changing μ shifts the distribution left or right. Changing σ increases or decreases the spread.

20. Central Bank of Egypt 20 IV-Probability Distributions The normal curve is not a single curve but a family of curves, each of which is determined by its mean and standard deviation. In order to work with a variety of normal curves, we cannot have a table for every possible combination of means and standard deviations.

21. Central Bank of Egypt 21 IV-Probability Distributions Standard normal curve: The Standard Normal Curve (z distribution) is the distribution of normally distributed standard scores with mean equal to zero and a standard deviation of one. A z score is nothing more than a figure, which represents how many standard deviation units a raw score is away from the mean. Z-score is useful in comparing variables with very different observed units of measure. Z-score allows for precise predictions to be made of how many of a population’s scores fall within a score range in a normal distribution.

22. Central Bank of Egypt 22 IV-Probability Distributions Z score: What we need is a standardized normal curve which can be used for any normally distributed variable. Such a curve is called the Standard Normal Curve.

23. Central Bank of Egypt 23 Interpreting the graph (empirical rule) IV-Probability Distributions

24. Central Bank of Egypt 24 V-Shape of Data There are further statistics that describe the shape of the distribution, using formulae that are similar to those of the mean and variance: 1 st moment - Mean (describes central value) 2 nd moment - Variance (describes dispersion) 3 rd moment - Skewness (describes asymmetry) 4 th moment - Kurtosis (describes peaked ness)

25. Central Bank of Egypt 25 V- shape of data Measures of asymmetry of data If skewness equals zero, the histogram is symmetric about the mean

26. Central Bank of Egypt 26 V- Shape of data Skewness: Positive or right skewed: There are more observations below the mean than above it When the mean is greater than the median Longer right tail Negative or left skewed: There are a small number of low observations and a large number of high ones When the median is greater than the mean Longer left tail

27. Central Bank of Egypt 27 V- Shape of data Skewness: Positive Skew Negative Skew Normal (skew = 0)

28. Central Bank of Egypt 28 V- Shape of data Kurtosis relates to the relative flatness or peaked ness of a distribution. A standard normal distribution (blue line: µ = 0;  = 1) has kurtosis = 0. A distribution like that illustrated with the red curve has kurtosis > 0 with a lower peak relative to its tails. Kurtosis

29. Central Bank of Egypt 29 V- Shape of data Platykurtic– When the kurtosis < 0, the frequencies throughout the curve are closer to be equal (i.e., the curve is more flat and wide) Thus, negative kurtosis indicates a relatively flat distribution Leptokurtic– When the kurtosis > 0, there are high frequencies in only a small part of the curve (i.e, the curve is more peaked) Thus, positive kurtosis indicates a relatively peaked distribution Kurtosis

30. Central Bank of Egypt 30 V- Shape of data Mesokurtic (s 4 = 3) Leptokurtic (s 4 > 3) Platykurtic (s 4 < 3)Kurtosis

31. Central Bank of Egypt 31 Jarque-Bera test: First we define the skewness (S) and kurtosis (K) of a set of returns : When returns are normally distributed: S=0 and K=0. The Jarque-Bera test allows us to test for normality of historical returns : This allows us to calculate the p-value: we can reject the hypothesis that returns are normally distributed with 100% (1-p) confidence VI-Testing for Normality Source: World Bank

32. Central Bank of Egypt 32 VII-Linear regression A statistical technique that uses a single, independent variable (X) to estimate a single dependent variable (Y). Based on the equation for a line: – Y = b + mX

33. Central Bank of Egypt 33 VII-Linear regression i  X Y YX    YiYi XiXi ? (the actual value of Y i )

34. Central Bank of Egypt 34 Regression Coefficients for a... Population Sample ˆ Y = b 0 + b 1 X i + e Y = b 0 + b 1 X i ˆ VII-Linear regression

35. Central Bank of Egypt 35 ANOVA - Variation SST SSE SSTR SST = SSTR + SSE SST is a measure of the total variation of observations. A measure of the differences in observations. Due to regression Random/unexplained. VII-Linear regression

36. Central Bank of Egypt 36 Linear Regression - Variation XiXi Y X Y SST =  (Y i - Y) 2 SSE =  (Y i - Y i ) 2  SSR =  (Y i - Y) 2  _ _ _ VII-Linear regression

37. Central Bank of Egypt 37 Determining the Regression Line/Model Manual Calculations SST =  (Y i - Y) 2 SSE =  (Y i - Y i ) 2 SSR =  (Y i - Y) 2 __ SSx =  (X i - X ) 2 _ SSy =  (Y i - Y) 2 _ SSxy =  (X i - X )(X i - Y ) __  b 1 =SSxy/SSx b 0 = Y – b 1 X __ MSE = SSE / df MSR = SSR / df R 2 = SSR/SST YX SSE S n-2  t-test = b 1 / S b1 VII-Linear regression

38. Central Bank of Egypt 38 Determining the Regression Line/Model using Excel VII-Linear regression

39. Central Bank of Egypt X- Matrix Operations

40. Central Bank of Egypt 40 Defining a Matrix

41. Central Bank of Egypt 41 Defining a Matrix

42. Central Bank of Egypt 42 Defining a Matrix

43. Central Bank of Egypt 43 Matrix addition and subtraction

44. Central Bank of Egypt 44 Matrix multiplication

45. Central Bank of Egypt 45 Matrix Transpose

46. Central Bank of Egypt 46 Matrix Inverse

47. Central Bank of Egypt 47 Determinant of a Matrix

48. Central Bank of Egypt Case study & Thank You