UNIVERSITY OF ZIMBABWE

BSc Honours in Statistics: Level 4 HSTS423

ECONOMETRICS

July 2020
Time : 2 hours

Candidates should attempt ALL questions in section A and TWO questions in section B.
Marks will be allocated as indicated

SECTION A (40 marks)

Candidates may attempt ALL questions being careful to number them A1 to A5.

A1. Let Yt = β0 +β1 Xt +ut be a two variable regression model. Suppose that error variance
is proportional to Xt2 ,
E(u2t ) = σ 2 Xt2
Determine an appropriate transformation of Y , X and u so that the model

Y ∗ = β0 + β1 X ∗ + u ∗

is homoscedastic. Justify your answer. [4,2]

A2. (a) Define the term ‘integration’. [2]

(b) Determine the order of integration of each of the following:
7 3 6
(i) Yt = 10 Yt−1 + 10 Yt−2 + at − 10 at−1 [4]
1 1 1 7
(ii) Yt = 2 Yt−1 − 4 Yt−2 + 8 Yt−3 + at + a
10 t−1
[4]

A3. State what each of these occurrences causes and which Ordinary Least Squares as-
sumption is violated by the following;

(a) prolonged shock effects, [2]

(b) omision of relevant explanatory variables, and [2]
(c) economic linkages. [2]

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A4. Given the following simultaneous equations:

y1 = y3 − y2 − 2x3 + u1
y2 = y1 + x3 + u2
y3 = 3y2 − 2x1 + x2 + u3

Determine the identification status using the

(a) order condition. [6]

(b) rank condition. [6]

A5. Derive Koyck’s geometric scheme for the model;

Yt = a0 + b0 Xt + b1 Xt−1 + b2 Xt−2 + . . . + ut

where ut ∼ N (0, σu2 ), E(ui , uj ) = 0 for i 6= j, E(ui Xi ) = 0 for i = 1, . . . , k. [6]

SECTION B (60 marks)

Candidates may attempt TWO questions being careful to number them B6 to B8.

B6. (a) Define the term ’heteroscedasticity’. [2]

(b) State and explain four main causes of heteroscedasticity. [8]
(c) The following data show expenditure data.

Household 1 2 3 4 5 6 7 8 9 10 11 12
Income group 1 1 1 1 2 2 2 2 3 3 3 3
Consumption 300 320 220 220 200 240 260 260 120 80 130 250

Use the Barttlet’s procedure to test for heteroscedasticity. [10]

(d) Consider the folowing data relating to Consumption (C) as a function of income
(Y ) in dollars.
Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
C 290 300 310 330 340 350 370 390 410 430
Y 330 330 340 360 380 390 410 420 460 490
Assuming that the 2015 and 2016 figures are excluded, use the Goldfeld-Quandt
method to test for heteroscedasticity. [10]

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B7. (a) In simultaneous equations explain what is meant by the ‘identification prob-
lem’ ? [2]
(b) Explain what is meant by saying that an equation is;
(i) exactly identified, [2]
(ii) not identified, and [2]
(iii) overidentified. [2]
(c) Can any use be made of a model in which the equations are not identified? [2]
(d) Consider the following model:

Qd = α1 + α2 P + α3 Y
Qs = β1 + β2 P + β3 W
Qd = Qs
The endogenous variables are Qd , Qs and P . The variables Y and W are exoge-
neous.
(i) Verify the identification status of the model using both the rank and the order
form. [4,4]
(ii) Find the reduced form of the model. [6]
(iii) Explain what is meant by saying that this model could be estimated by
indirect least squares and briefly describe the indirect least squares estimation
procedure. [2,4]

B8. (a) With the aid of a diagram, describe the critical region for the Durbin-Watson
test. [4]
(b) Given the following data on quantity supplied (Yt ) and price (Xt ) of a certain
commodity:

Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Yt 2 2 2 1 3 5 6 6 10 10
Xt 1 2 3 4 5 6 7 8 9 10

(i) Fit the simple linear regression model Yt = b0 + b1 Xt + at and calculate the
value of R2 . [4,2]
(ii) Test for autocorrelation using the Durbin-Watson test at α = 0.05 level of
significance with dL = 0.879 and dU = 1.320. [8]
(iii) Using d, estimate the sample autocorrelation of the residuals at and use your
estimate to transform your original data by;
Yt∗ = [Yt − ρ̂Yt−1 ]
Xt∗ = [Xt − ρ̂Xt−1 ] [2, 4]
(iv) Apply OLS to the transformed data and compare your results with the OLS
estimates obtained from the original sample observations. [4,2]

END OF EXAMINATION

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