CHAPTER 1

1. If a researcher uses daily data to examine a particular problem and creates a variable that assigns a
numerical value of 1 to Monday observations, what term would best describe this type of number?
a. Continuous
b. Cardinal
c. Ordinal
d. Nominal
2. The price of a house is best described as what type of number?
a. Continuous
b. Cardinal
c. Ordinal
d. Nominal
3. Which of the following is NOT a feature of continuously compounded returns (i.e. log-returns)?
a. They can be interpreted as continuously compounded changes in the prices
b. They can be added over time to give returns for longer time periods
c. They can be added across a portfolio of assets to give portfolio returns
d. They are usually fat-tailed
4. Suppose that observations are available on the monthly bond prices of 100 companies for 5 years.
What type of data are these?
a. Cross-sectional
b. Time-series
c. Panel
d. Qualitative
5. The score associated with a credit rating is best described as a/an:
a. Cardinal number
b. Ordinal number
c. Nominal number
d. Continuous number
6. In a cross-country study, a researcher codes the US as “1”, Europe as “2” and the rest of the world as
“3”. This is best described as a/an:
a. Cardinal number
b. Ordinal number
c. Nominal number
d. Continuous number
7. The yield to maturity on a bond is best described as a/an:
a. Cardinal number
b. Ordinal number
c. Nominal number
d. Continuous number
8. A share price is quoted in units of pennies. Which term best describes this sort of data?
a. Discrete
b. Continuous
c. Ordinal
d. Nominal
9. Which of the following statements is FALSE concerning log-price relatives (log returns)?
a. They can be interpreted as continuously compounded returns
b. They can be validly averaged over time
c. They can be validly averaged cross-sectionally
d. They can be expressed in proportion or percentage terms
10. Which of the following statements is TRUE concerning simple returns?
a. They can be interpreted as continuously compounded returns
b. They can be validly averaged over time
c. They can be validly averaged cross-sectionally
d. They can be expressed in proportion or percentage terms
11. Suppose that the simple returns on a stock for each of four years are 10%, -6%, 13% and -8%. The
appropriately calculated aggregate return over the whole four-year period to the nearest 1% is:
a. 9%
b. 2%
c. 7%
d. 1.8%
12. Suppose that the log returns on a stock for each of four years are 10%, -6%, 13% and -8%. The
appropriately calculated aggregate return over the whole four-year period to the nearest 1% is:
a. 9%
b. 2%
c. 7%
d. 1.8%

CHAPTER 2
1. Suppose that we estimate a relationship between volatility, y in percent, and the number of stocks in
a portfolio, x given by y = 86.4 – 1.2x. If a portfolio contains twenty five stocks, what would be the
volatility to the nearest 1%?
a. 86%
b. 1%
c. 56%
d. 25%
2. Given the scenario in question 1, How many stocks would be required to achieve a volatility of 10%?
a. 86
b. 64
c. 74
d. 1
3. A straight line has a gradient of 1.4 and crosses the x-axis at -0.8. What is the value of y when x = 3.2?
a. 1.4
b. 3.68
c. 1.12
d. 5.6
4. The point at which a function crosses the x-axis is called:
a. The intercept
b. The slope
c. A root
d. The origin
5. If the relationship between two variables is y = 3x3 + 2x2 + x – 6, what is the functional form that links
them?
a. Linear
b. Non-linear
c. Quadratic
d. Exponential
6. If the relationship between two variables is y = –4x + 2, what is the functional form that links them?
a. Linear
b. Non-linear
c. Quadratic
d. Cubic
7. If we plot the relationship y = a + bx on a graph, what will be the interpretation of a?
a. The point where the line crosses the x-axis
b. The point where the line crosses the y-axis
c. The slope of the line
d. The origin
8. If we know that relationship y = a + bx yields a horizontal line, which restriction must hold?
a. a = 0
b. b = 0
c. a =0 and b = 0
d. x = 0
9. If we know that relationship y = a + bx yields a line at 45 degrees to the x-axis, which restriction must
hold?
a. a =1
b. a = b
c. b=1
d. b = 0
10. Which type of function y plotted against x always has a gradient that is increasing in x?
a. A quadratic function
b. A linear function
c. An exponential function
d. A logarithmic function
11. A cubic function, y = f(x) will have how many UNIQUE roots?
a. 3
b. at most 3
c. 0
d. at least 1
12. Which shape will be the function y = –3 + 2x – x2?
(i) Always upward sloping
(ii) Always downward sloping
(iii) U-shaped
(iv) ∩-shaped
13. What are the roots of the equation y = x2 – 9x?
a. 0 and 9
b. 3 (repeated)
c. 0, 3 and 9
d. Both complex
14. A plot of the function y = log(x) will:
a. Cross the y-axis at one

b. Cross the x-axis at one

c. Have a gradient that increases with x
d .Have a constant gradient
15. Another way of writing log(x + y) is:
a. log(x) + log(y)
b. log (x) x log(y)
c. log(xy)
d. None of the above apply.
16. Log(0) is:
a. 1
b. 0
c. 2.71828
d. Undefined

17. Writing out all the terms in the expression  would lead to:
(i) 3x3
(ii) x3
(iii) 27x3
(iv) 27x
18. The derivative of a function y with respect to x is:
(i) The gradient of the curve
(ii) The rate of change of y with respect to x
(iii) The area under the curve
(iv) Zero at a turning point
a. (i) only
b. (i) and (ii) only
c. (i), (ii) and (iv) only
d. All of (i) to (iv)
19. The derivative of y = 1/x is:
a. 1/x²
b. log(x)
c. 1/x
d. X
20. The derivative of 5log(x) is:
a. 5/x
b. 5
c. 5log(x)
d. 5/log(x)
21. The second derivative of 8x2 is:
a. 16x2
b. 16x
c. 16
d. 0
22. The second derivative of -4x is:
a. -4x
b. -4x2
c. -4
d. 0
23. The partial derivative of 6x2 + 2x + 3xy + 4y – 2y2 with respect to y is:
a. 0
b. 12x + 6 – 4y
c. 6x² + 2x + 3 + y – 4y
d. 3x + 4-4y

24. What are the dimensions of the matrix

a. 2 x 2
b. 3 x 2
c. 2 x 3
d. square
25. Which of the following is an identity matrix?
(i) (1)

(ii)  

(iii)

(iv)
26. If A is of dimension 1 x 4 and B is of dimension 4 x 1, what is the most accurate term to describe the
matrix A?
a. A scalar
b. A column vector
c. A row vector
d. A matrix
27. If A is of dimension 1 x 4 and B is of dimension 4 x 1, what is the most accurate term to describe the
result of the matrix multiplication BA?
a. A scalar
b. A column vector
c. A row vector
d. A matrix
28. If A is of dimension 1 x 4 and B is of dimension 2 x 4, what will be the dimensions of the matrix
multiplication AB?
a. 1 x 4
b. 4 x 4
c. 2 x 4
d. This matrix multiplication is undefined

29. The inverse of the matrix  is:

(i)

(ii)

(iii)
(iv) Undefined

30. The matrix  is:

(i) Square
(ii) Singular
(iii) Non-invertible
(iv) Of full rank
a. (i) only
b. (i) and (iii) only
c. (i), (ii) and (iii) only
d. (i) to (iv) are all correct
31. The determinant of a singular matrix will be:
a. 0
b. 1
c. A positive integer
d. Equal to the dimension of the square matrix

32. What are the eigenvalues of the matrix ?

a. 0 and 0
b. 1 and 2
c. 0 and 1
d. 2 and 2

CHAPTER 3
1. Which of the following are alternative names for the dependent variable (usually denoted by y) in
linear regression analysis?
(i) The regressand
(ii) The regressor
(iii) The explained variable
(iv) The explanatory variable
a. ii and iv
b. i and iii
c. i ii, iii
d. all of the above 
2. Which of the following are alternative names for the independent variable (usually denoted by x) in
linear regression analysis?
(i) The regressor
(ii) The regressand
(iii) The causal variable
(iv) The effect variable
a. ii and iv 
b. i and iii
c. i ii and iii 
all of the above
3. Which of the following statements is TRUE concerning the standard regression model?
a. y has a probability distribution
b. x has a probability distribution
c. the disturbance is assume to be correlated with x
d. for an adequate model, the reisdual (u-hat) will bezero for all sample data points.
4. Which of the following statements is TRUE concerning OLS estimation?
a. OLS minimises the sum of the vertical distances from the points to the line
b. OLS minimises the sum of the squares of the vertical distances from the points to the line
c. OLS minimises the sum of the horizontal distances from the points to the line
d. OLS minimises the sum of the squares of the horizontal distances from the points to the line
5. The residual from a standard regression model is defined as
a. The difference between the actual value, y, and the mean, y-bar
b. The difference between the fitted value, y-hat, and the mean, y-bar
c. The difference between the actual value, y, and the fitted value, y-hat
d. The square of the difference between the fitted value, y-hat, and the mean, y-bar.
6. Which one of the following statements best describes the algebraic representation of the fitted
regression line?

(i)

(ii)

(iii)

(iv)
a. (i)
b. (ii)
c. (iii)
d. (iv)
7. Which of the following statements concerning the regression population and sample is FALSE?
a. the population is the total collection of all items of interest
b. the population can be infinite
c. the theory, the sample could be larger than the population
d. a random sample is one where each individual item from the population is equally likely to be drawn
8. Which of the following statements is true concerning the population regression function (PRF) and
sample regression function (SRF)?
a. the PRF is the estimated model
b. the PRF is used to infer likely values of the SRF
c. whether the model is good can be determined by comparing the SRF and the PRF
d. the PRF is a description of the process though to be generating the data
9. Which of the following models can be estimated using OLS, following suitable transformations if
necessary? (Note that “e” denotes the exponential).

(i)

(ii)

(iii)

(iv)
a. (i) only
b. (i) and (iii) only
c. (i), (iii) and (iv) only
d. (i), (ii), (iii), and (iv)
10. Which of the following is an equivalent expression for saying that the explanatory variable is "non-
stochastic"?
a. The explanatory variable is partly random
b. The explanatory variable is fixed in repeated samples
c. The explanatory variable is correlated with the errors
d. The explanatory variable always has a value of one
11. If an estimator is said to be consistent, it is implied that
a. On average, the estimated coefficient values will equal the true values
b. The OLS estimator is unbiased and no other unbiased estimator has a smaller variance
c. The estimates will converge upon the true values as the sample size increases
d. The coefficient estimates will be as close to their true values as possible for small and large samples.
12. If an estimator is said to have minimum variance, which of the following statements is NOT implied?
a. The probability that the estimate is a long way away from its true value is minimised
b. The estimator is efficient
c. such an estimator would be termed "best"
d. such an estimator will always be unbiased
13. Consider the OLS estimator for the standard error of the slope coefficient. Which of the following
statement(s) is (are) true?
i: The standard error will be positively related to the residual variance
ii: The standard error will be negatively related to the dispersion of the observations on the explanatory
variable about their mean value
iii: The standard error will be negatively related to the sample size
iv: The standard error gives a measure of the precision of the coefficient estimate.
a. ii and iv
b. i and iii
c. i, ii, iii
d. all of the above
14. Which of the following statements is INCORRECT concerning the classical hypothesis testing
framework?
a. If the null hypothesis is rejected, the alternative is accepted
b. The null hypothesis is the statement being tested while the alternative encompasses the remaining
outcomes of interest
c. The test of significance and confidence interval approaches will always give the same conclusions
d. Hypothesis tests are used to make inferences about the population parameters.
15. Suppose that a hypothesis test is conducted using a 5% significance level. Which of the following
statements are correct?
i: The significance level is equal to the size of the test
ii: The significance level is equal to the power of the test
iii: 2.5% of the total distribution will be in each tail rejection region for a 2-sided test
iv: 5% of the total distribution will be in each tail rejection region for a 2-sided test.
a. ii and iv
b. i and iii
c. i ii iii
d. all of the above

16. The following regression results are gained for the model , estimated using 100
observations, and where standard errors are presented in parentheses:

Consider a test of the null hypothesis that the true value of the slope coefficient is –1. Using a 5% one-
sided test, where the alternative is of the form H 1: β < -1, what is the appropriate conclusion?
(i) H0 is rejected
(ii) H0 is not rejected
(iii) H1 is rejected
(iv) There is insufficient information given in the question to reach a conclusion
17. Consider an identical situation to that of question 16, except that now a 2-sided alternative is used.
What would now be the appropriate conclusion?
(i) H0 is rejected
(ii) H0 is not rejected
(iii) H1 is rejected
(iv) There is insufficient information given in the question to reach a conclusion.
18. Which one of the following would be the most appropriate as a 95% (two-sided) confidence interval
for the intercept term of the model given in question 21?
a. (-4.79,2.19)
b. (-4.16,4.16)
c. (-1.98,1.98)
d. (-5.46,2.86)
19. Which one of the following is the most appropriate definition of a 99% confidence interval?
a. 99% of the time in repeated samples, the interval would contain the true value of the parameter
b. 99% of the time in repeated samples, the interval would contain the estimated value of the
parameter
c. 99% of the time in repeated samples, the null hypothesis will be rejected
d. 99% of the time in repeated samples, the null hypothesis will not be rejected when it was false
20. Which one of the following statements best describes a Type II error?
a. It is the probability of incorrectly rejecting the null hypothesis
b. It is equivalent to the power of the test
c. It is equivalent to the size of the test
d. It is the probability of failing to reject a null hypothesis that was wrong
21. Suppose that a test statistic has associated with it a p-value of 0.08. Which one of the following
statements is true?
(i) If the size of the test were exactly 8%, we would be indifferent between rejecting and not rejecting
the null hypothesis
(ii) The null would be rejected if a 10% size of test were used
(iii) The null would not be rejected if a 1% size of test were used
(iv) The null would be rejected if a 5% size of test were used.
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i) (ii) and (iii) only
d. (i) (ii) (iii) (iv)

CHAPTER 4
1. Suppose that the following regression is estimated using 27 quarterly observations:

What is the appropriate critical value for a 2-sided 5% size of test of H 0: β3 = 1?
a. 1.64
b. 1.71
c. 2.06
d. 1.96
2. Under the matrix notation for the classical linear regression model, y = Xβ + u, what are the
dimensions of u?
a. T x k
b. T x 1
c. k x 1
d. 1x1
3. What are the dimensions of û'û?
a. T x k
b. T x 1
c. k x 1
d. 1x1
4. Consider the following statistics calculated from the raw data:

for the model  estimated using 30 monthly observations.

What is the estimate for β3?
a. 0.01
b. 0.2
c. -0.09
d. 0.4
5. What is the estimate for the standard error for β2?
a. 0.6
b. 0.013
c. 0.12
d. 0.022
6. What is the test statistic resulting from a test of the null hypothesis that the true value of the
intercept coefficient is zero?
a. -1.10
b. -0.09
c. 0.3
d. 0.6
7. Suppose that a test that the true value of the intercept coefficient is zero results in non-rejection.
What would be the appropriate conclusion?
a. Drop the intercept and re-run the regression
b. Retain the intercept
c. Re-compute the test statistic
d. The regression line is running exactly through the origin.
8. Suppose that 100 separate firms were tested to determine how many of them “beat the market”
using a Jensen-type regression, and it is found that 3 fund managers significantly do so. Does this
suggest prima facie evidence for stock market inefficiency?
a. Yes
b. No
c. In order to answer this question, you would need to test every fund manager trading in that market
d. There is insufficient information given in the question to draw a conclusion about market efficiency.
9. Consider the following regression equation estimated using 1,000 daily observations.

(1)
Which one of the following would be a possible restricted regression for a test of the null hypothesis
H0: β2 + β3 = 1?
(i)  The restricted regression would be the one labelled as equation (1) above

(ii)

(iii)

(iv)
10. Consider the following regression equation estimated using 1,000 daily observations.

(1)
Which of the following null hypotheses could be tested using an F-test?
(i) β2 = 1
(ii) β32 = 1
(iii) β4 = -β2
(iv) β3β4 = 0
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i) (ii) and (iii) only
d. (i) (ii) (iii) (iv)
11. Consider the following regression equation estimated using 1,000 daily observations.

(1)
Suppose that the test in question 9 were conducted, [Which one of the following would be a possible
restricted regression for a test of the null hypothesis H 0: β2 + β3 = 1?] what would be the relevant critical
value from the statistical tables with which to compare the test statistic?
a. 254
b. 253
c. 3.00
d. 3.84
12. Consider the following regression equation estimated using 1,000 daily observations.

(1)
Suppose that the test in question 9 were conducted, [Which one of the following would be a possible
restricted regression for a test of the null hypothesis H 0: β2 + β3= 1?] and the two required residual sums
of squares are 30.2 and 28.1, what is the F-test statistic?
a. 37.2
b. -37.2
c. 74.4
d. -74.4
13. Consider the following regression equation estimated using 1,000 daily observations.

(1)
What would be the null hypothesis for the standard regression F-test for equation (1) above?
(i) β2 = 0 and β3 = 0 and β4 = 0
(ii) β2 = 0 or β3 = 0 or β4 = 0
(iii) β1 = 0 and β2 = 0 and β3 = 0 and β4 = 0
(iv) β1 = 0 or β2 = 0 or β3 = 0 or β4 = 0
14. Which one of the following is examined by looking at a goodness of fit statistic?
a. How well the population regression function fits the data
b. How well the sample regression function fits the population regression function
c. How well the sample regression function fits the data
d. How well the population regression function fits the sample regression function
15. Suppose that the value of R2 for an estimated regression model is exactly zero. Which of the
following are true?
(i) All coefficient estimates on the slopes will be zero
(ii) The fitted line will be horizontal with respect to all of the explanatory variables
(iii) The regression line has not explained any of the variability of y about its mean value
(iv) The intercept coefficient estimate must be zero.
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i) (ii) and (iii) only
d. (i) (ii) (iii) (iv)
16. Consider the following 2 regression models:
Model 1:

Model 2:
Which of the following statements are true?
(i) Model 2 must have an R2 at least as high as that of model 1
(ii) Model 2 must have an adjusted R2 at least as high as that of model 1
(iii) Models 1 and 2 would have identical values of R2 if the estimated coefficient on α3 is zero
(iv) Models 1 and 2 would have identical values of adjusted R2 if the estimated coefficient on α3 is zero.
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i) (ii) and (iii) only
d. (i) (ii) (iii) (iv)
17. Suppose that, for the models in question 16, the R2 is higher for model 2 but the adjusted R2 is lower
for model 2. Which one of the following is the most plausible explanation?
(i) The coefficient estimate on α3 is zero
(ii) The coefficient estimate α3 is non-zero but not significant
(iii) The variable x3t is highly correlated with the variable x2t
(iv) The researcher must have made a mistake since the situation described in the question could not
happen.
18. Suppose that the two models in question 16 have identical R2 values. Which one of the following
statements is true?
(i) The two models will also have identical values of adjusted R2
(ii) Model 2 must have a higher value of adjusted R2
(iii) Model 2 must have a lower value of adjusted R2
(iv) It is not possible to determine which model will have the higher R2 without knowing the sample size.
19. Which of the following is not an advantage of quantile regressions compared with standard OLS?
a. Quantile regressions are more robust to outliers
b. Quantile regressions do not require the homoscedasticity assumption
c. Quantile regressions can capture non-linear relationships between variables
d. Quantile regressions can be used to capture tail behaviour
20. What does a quantile regression measure?
a. The entire distribution of y given the distributions of the explanatory variables
b. The fifth and ninety fifth percentiles of y only given the explanatory variables
c. The median of y only given the explanatory variables
d. The relationship between the mean of y and the mean of the explanatory variables
21. The parameters of a quantile regression function are estimated by:
a. Minimising the sum of squared residuals
b. Minimising the sum of the absolute values of the residuals
c. Minimising the sum of the weighted absolute values of the residuals
d. Minimising the weighted sum of squared residuals

CHAPTER 5
1. Which of the following assumptions are required to show the consistency, unbiasedness and
efficiency of the OLS estimator?
(i) E(ut) = 0
(ii) Var(ut) = δ2
(iii) Cov(ut, ut-j) = 0  j
(iv) ut ~ N(0, δ2)
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i) (ii) and (iii) only
d. (i) (ii) (iii) (iv)
2. Which of the following may be consequences of one or more of the CLRM assumptions being
violated?
(i) The coefficient estimates are not optimal
(ii) The standard error estimates are not optimal
(iii) The distributions assumed for the test statistics are inappropriate
(iv) Conclusions regarding the strength of relationships between the dependent and independent
variables may be invalid.
 a. (ii) and (iv) only
b. (i) and (iii) only
c. (i) (ii) and (iii) only
d. (i) (ii) (iii) (iv)
3. What is the meaning of the term “heteroscedasticity”?
a. The variance of the errors is not constant
b. The variance of the dependent variable is not constant
c. The errors are not linearly independent of one another
d. The errors have non-zero mean
4. Consider the following regression model

(2)
Suppose that a researcher is interested in conducting White’s heteroscedasticity test using the residuals
from an estimation of (2). What would be the most appropriate form for the auxiliary regression?

(i)

(ii)

(iii)

(iv)
5. Consider the following regression model

(2)
Suppose that model (2) is estimated using 100 quarterly observations, and that a test of the type
described in question 4 is conducted. What would be the appropriate 2 critical value with which to
compare the test statistic, assuming a 10% size of test?
a. 2.71
b. 118.5
c. 11.07
d. 9.24
6. What would be then consequences for the OLS estimator if heteroscedasticity is present in a
regression model but ignored?
a. It will be biased
b. It will be inconsistent
c. It will be inefficient
d. All of (a), (b) and (c) will be true
7. Which of the following are plausible approaches to dealing with a model that exhibits
heteroscedasticity?
(i) Take logarithms of each of the variables
(ii) Use suitably modified standard errors
(iii) Use a generalised least squares procedure
(iv) Add lagged values of the variables to the regression equation.
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i) (ii) and (iii) only
d. (i) (ii) (iii) (iv)
8. Negative residual autocorrelation is indicated by which one of the following?
a. A cyclical pattern in the residuals
b. An alternating pattern in the residuals
c. A complete randomness in the residuals
d. Residuals that are all close to zero
9. Which of the following could be used as a test for autocorrelation up to third order?
a. The Durbin Watson test
b. White’s test
c. The RESET test
d. The Breusch-Godfrey test
10. If a Durbin Watson statistic takes a value close to zero, what will be the value of the first order
autocorrelation coefficient? 10. If a Durbin Watson statistic takes a value close to zero, what will be the
value of the first order autocorrelation coefficient?
a. Close to zero
b. Close to plus one
c. Close to minus one
d. Close to either minus one or plus one
11. Suppose that the Durbin Watson test is applied to a regression containing two explanatory variables
plus a constant (e.g. equation 2 above) with 50 data points. The test statistic takes a value of 1.53. What
is the appropriate conclusion?
a. Residuals appear to be negatively autocorrelated
b. Residuals appear not to be autocorrelated
c. The test result is inconclusive
12. Suppose that a researcher wishes to test for autocorrelation using an approach based on an auxiliary
regression. Which one of the following auxiliary regressions would be most appropriate?

(i)

(ii)

(iii)

(iv)
13. If OLS is used in the presence of autocorrelation, which of the following will be likely consequences?
(i) Coefficient estimates may be misleading
(ii) Hypothesis tests could reach the wrong conclusions
(iii) Forecasts made from the model could be biased
(iv) Standard errors may inappropriate
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i) (ii) and (iii) only
d. (i) (ii) (iii) (iv)
14. Which of the following are plausible approaches to dealing with residual autocorrelation?
(i) Take logarithms of each of the variables
(ii) Add lagged values of the variables to the regression equation
(iii) Use dummy variables to remove outlying observations
(iv) Try a model in first differenced form rather than in levels.
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i) (ii) and (iii) only
d. (i) (ii) (iii) (iv)
15. Which of the following could result in autocorrelated residuals?
(i) Slowness of response of the dependent variable to changes in the values of the independent variables
(ii) Over-reactions of the dependent variable to changes in the independent variables
(iii) Omission of relevant explanatory variables that are autocorrelated
(iv) Outliers in the data
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i) (ii) and (iii) only
d. (i) (ii) (iii) (iv)
16. Including relevant lagged values of the dependent variable on the right hand side of a regression
equation could lead to which one of the following?
a. Biased but consistent coefficient estimates
b. Biased and inconsistent coefficient estimates
c. Unbiased but inconsistent coefficient estimates
d. Unbiased and consistent but inefficient coefficient estimates
17. Near multicollinearity occurs when
a. Two or more explanatory variables are perfectly correlated with one another
b. The explanatory variables are highly correlated with the error term
c. The explanatory variables are highly correlated with the dependent variable
d. Two or more explanatory variables are highly correlated with one another
18. Which one of the following is NOT a plausible remedy for near multicollinearity?
a. Use principal components analysis
b. Drop one of the collinear variables
c. Use a longer run of data
d. Take logarithms of each of the variables
19. What will be the properties of the OLS estimator in the presence of multicollinearity?
a. It will be consistent, unbiased and efficient
b. It will be consistent and unbiased but not efficient
c. It will be consistent but not unbiased
d. It will not be consistent
20. Which one of the following is NOT an example of mis-specification of functional form?
a. Using a linear specification when y scales as a function of the squares of x
b. Using a linear specification when a double-logarithmic model would be more appropriate
c. Modelling y as a function of x when in fact it scales as a function of 1/x
d. Excluding a relevant variable from a linear regression model
21. If the residuals from a regression estimated using a small sample of data are not normally
distributed, which one of the following consequences may arise?
a. The coefficient estimates will be unbiased but inconsistent
b. The coefficient estimates will be biased but consistent
c. The coefficient estimates will be biased and inconsistent
d. Test statistics concerning the parameters will not follow their assumed distributions.
22. A leptokurtic distribution is one which
a. Has fatter tails and a smaller mean than a normal distribution with the same mean and variance
b. Has fatter tails and is more peaked at the mean than a normal distribution with the same mean and
variance
c. Has thinner tails and is more peaked at the mean than a normal distribution with the same mean and
variance
d. Has thinner tails than a normal distribution and is skewed
23. Under the null hypothesis of a Bera-Jarque test, the distribution has
a. Zero skewness and zero kurtosis
b. Zero skewness and a kurtosis of three
c. Skewness of one and zero kurtosis
d. Skewness of one and kurtosis of three
24. Which one of the following would be a plausible response to a finding of residual non-normality?
a. Use a logarithmic functional form instead of a linear one
b. Add lags of the variables on the right hand side of the regression model
c. Estimate the model in first differenced form
d. Remove any large outliers from the data
25. A researcher tests for structural stability in the following regression model:

(3)
The total sample of 200 observations is split exactly in half for the sub-sample regressions. Which would
be the unrestricted residual sum of squares?
a. The RSS for the whole sample
b. The RSS for the first sub-sample
c. The RSS for the second sub-sample
d. The sum of the RSS for the first and second sub-samples
26. Suppose that the residual sum of squares for the three regressions corresponding to the Chow test

described in question 25 [ ] are 156.4, 76.2 and 61.9. What is the value of
the Chow F-test statistic?
a. 4.3
b. 7.6
c. 5.3
d. 8.6
27. What would be the appropriate 5% critical value for the test described in questions 25 and 26?

a. 2.6
b. 8.5
c. 1.3
d. 9.2
28. Suppose now that a researcher wants to run a forward predictive failure test on the last 5

observations using the same model and data as in question 25 . Which

would now be the unrestricted residual sum of squares?
a. The RSS for the whole sample regression
b. The RSS for the long sub-sample regression
c. The RSS for the short sub-sample regression
d. The sum of the RSS for the long and short sub-sample regressions
29. If the two RSS for the test described in question 28 are 156.4 and 128.5, what is the value of the test
statistic?
a. 13.8
b. 14.3
c. 8.3
d. 8.6
30. If a relevant variable is omitted from a regression equation, the consequences would be that:
(i) The standard errors would be biased
(ii) If the excluded variable is uncorrelated with all of the included variables, all of the slope coefficients
will be inconsistent.
(iii) If the excluded variable is uncorrelated with all of the included variables, the intercept coefficient
will be inconsistent.
(iv) If the excluded variable is uncorrelated with all of the included variables, all of the slope and
intercept coefficients will be consistent and unbiased but inefficient.
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i) (ii) and (iii) only
d. (i) (ii) (iii) (iv)
31. A parsimonious model is one that
a. Includes too many variables
b. Includes as few variables as possible to explain the data
c. Is a well-specified model
d. Is a mis-specified model
32. An overparameterised model is one that
a. Includes too many variables
b. Includes as few variables as possible to explain the data
c. Is a well-specified model
d. Is a mis-specified model
33. Which one of the following is a disadvantage of the general to specific or “LSE” (“Hendry”) approach
to building econometric models, relative to the specific to general approach?
a. Some variables may be excluded at the first stage leading to coefficient biases
b. The final model may lack theoretical interpretation
c. The final model may be statistically inadequate
d. If the initial model is mis-specified, all subsequent steps will be invalid
34. Which of the following consequences might apply if an explanatory variable in a regression is
measured with error?
(i) The corresponding parameter will be estimated inconsistently
(ii) The corresponding parameter estimate will be biased towards zero
(iii) The assumption that the explanatory variables are non-stochastic will be violated
(iv) No serious consequences will arise
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i) (ii) and (iii) only
d. (i) (ii) (iii) (iv)
35. Which of the following consequences might apply if the explained variable in a regression is
measured with error?
(i) The corresponding parameter will be estimated inconsistently
(ii) The corresponding parameter estimate will be biased towards zero
(iii) The assumption that the explanatory variables are non-stochastic will be violated
(iv) No serious consequences will arise
 a. (i) only
b. (i) and (ii) only
c. (i) (ii) and (iii) only
d. (iv) only

CHAPTER 6
1. Which of the following is a typical characteristic of financial asset return time-series?
a. Their distributions are thin-tailed
b. They are not weakly stationary
c. They are highly autocorrelated
d. They have no trend
2. Which of the following is a DISADVANTAGE of using pure time-series models (relative to structural
models)?
a. They are not theoretically motivated
b. They cannot produce forecasts easily
c. They cannot be used for very high frequency data
d. It is difficult to determine the appropriate explanatory variables for use in pure time-series models
3. Which of the following conditions are necessary for a series to be classifiable as a weakly stationary
process?
(i) It must have a constant mean
(ii) It must have a constant variance
(iii) It must have constant autocovariances for given lags
(iv) It must have a constant probability distribution
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i), (ii), and (iii) only
d. (i), (ii), (iii), and (iv).
4. A white noise process will have
(i) A zero mean
(ii) A constant variance
(iii) Autocovariances that are constant
(iv) Autocovariances that are zero except at lag zero
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i), (ii), and (iii) only
d. (i), (ii), (iii), and (iv).
5. Consider the following sample autocorrelation estimates obtained using 250 data points:
Lag                  1          2          3
Coefficient      0.2       -0.15    -0.1
Assuming that the coefficients are approximately normally distributed, which of the coefficients are
statistically significant at the 5% level?
a. 1 only
b. 1 and 2 only
c. 1, 2 and 3 only
d. It is not possible to determine the statistical significance since no standard errors have been given
6. Consider again the autocorrelation coefficients described in question 5. The value of the Box-Pierce Q-
statistic is
a. 0.12
b. 37.50
c. 18.12
d. 18.09
7. Which of the following statements is INCORRECT concerning a comparison of the Box-Pierce Q and
the Ljung-Box Q* statistics for linear dependence in time series?
a. Asymptotically, the values of the two test statistics will be equal
b. The Q test has better small-sample properties than the Q*.
c. The Q test is sometimes over-sized for small sample
d. As the sample size tends towards infinity, both tests will show a tendency to always reject the null
hypothesis of zero autocorrelation coefficients
8. Consider the following MA(3) process
            yt = μ + εt + θ1εt-1 + θ2εt-2 + θ3εt-3 , where εt is a zero mean white noise process with variance s2.
Which of the following statements are true
(i) The process yt has zero mean
(ii) The autocorrelation function will have a zero value at lag 5
(iii) The process yt has variance s2
(iv) The autocorrelation function will have a value of one at lag 0
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i), (ii), and (iii) only
d. (i), (ii), (iii), and (iv).
9. Consider a series that follows an MA(1) with zero mean and a moving average coefficient of 0.4. What
is the value of the autocovariance at lag 1?
a. 0.4
b. 1
c. 0.34
d. It is not possible to determine the value of the autocovariances without knowing the disturbance
variance.
10. For an autoregressive process to be considered stationary
a. The roots of the characteristic equation must all lie inside the unit circle
b. The roots of the characteristic equation must all lie on the unit circle
c. The roots of the characteristic equation must all lie outside the unit circle
d. The roots of the characteristic equation must all be less than one in absolute value
11. Consider the following AR(2) process:
            yt = 1.5 yt-1 - 0.5 yt-2 + ut
This is a
a. Stationary process
b. Unit root process
c. Explosive process
d. Stationary and unit root process
12. Consider the following AR(1) model with the disturbances having zero mean and unit variance
            yt = 0.2 + 0.4 yt-1 + ut
The (unconditional) mean of y will be given by
a. 0.2
b. 0.4
c. 0.5
d. 0.33
13. The (unconditional) variance of the AR(1) process for y given in question 12 will be
a. 1.19
b. 2.5
c. 1
d. 0.33
14. The value of the autocovariance function at lag 3 for the AR(1) model given in question 12 will be
a. 0.4
b. 0.064
c. 0
d. 0.076
15. The value of the autocorrelation function at lag 3 for the AR(1) model given in question 12 will be
a. 0.4
b. 0.064
c. 0
d. 0.076
16. Which of the following statements are true concerning the autocorrelation function (acf) and partial
autocorrelation function (pacf)?
(i) The acf and pacf will always be identical at lag one whatever the model
(ii) The pacf for an MA(q) model will in general be non-zero beyond lag q
(iii) The pacf for an AR(p) model will be zero beyond lag p
(iv) The acf and pacf will be the same at lag two for an MA(1) model
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i), (ii), and (iii) only
d. (i), (ii), (iii), and (iv).
17. An ARMA(p,q) (p, q are integers bigger than zero) model will have
a. An acf and pacf that both decline geometrically
b. An acf that declines geometrically and a pacf that is zero after p lags
c. An acf that declines geometrically and a pacf that is zero after q lags
d. An acf that is zero after p lags and a pacf that is zero after q lags
18. The pacf is necessary for distinguishing between
a. An AR and an MA model
b. An AR and an ARMA model
c. An MA and an ARMA model
d. Different models from within the ARMA family
19. The characteristic roots of the MA process
            yt = -3ut-1 + ut-2 + ut
a. 1 and 2
b. 1 and 0.5
c. 2 and -0.5
d. 1 and -3
20. Consider the following picture and suggest the model from the following list that best characterises
the process:

 
a. An AR(1)
b. An ARMA(2,1)
c. An MA(2)
d. An AR(2)
21. Consider the following picture and suggest the model from the following list that best characterises
the process:

a. An MA(2)
b. An AR(2)
c. An ARMA(1,1)
d. An AR(1)
22. Which of the following statements are true concerning the acf and pacf?
(i) The acf and pacf are often hard to interpret in practice
(ii) The acf and pacf can be difficult to calculate for some data sets
(iii) Information criteria represent an alternative approach to model order determination
(iv) If applied correctly, the acf and pacf will always deliver unique model selections
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i), (ii), and (iii) only
d. (i), (ii), (iii), and (iv).
23. Which of the following statements are true concerning the Box-Jenkins approach to diagnostic
testing for ARMA models?
(i) The tests will show whether the identified model is either too large or too small
(ii) The tests involve checking the model residuals for autocorrelation, heteroscedasticity, and non-
normality
(iii) If the model suggested at the identification stage is appropriate, the acf and pacf for the residuals
should show no additional structure
(iv) If the model suggested at the identification stage is appropriate, the coefficients on the additional
variables under the overfitting approach will be statistically insignificant
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i), (ii), and (iii) only
d. (i), (ii), (iii), and (iv).
24. Which of the following statements are true concerning information criteria?
(i) Adjusted R-squared is an information criterion
(ii) If the residual sum of squares falls when an additional term is added, the value of the information
criterion will fall
(iii) Akaike’s information criterion always leads to model orders that are at least as large as those of
Schwarz’s information criterion
(iv) Akaike’s information criterion is consistent
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i), (ii), and (iii) only
d. (i), (ii), (iii), and (iv).
25. Consider the following ARMA(2,1) equation (with standard errors in parentheses) that has been
estimated as part of the Box-Jenkins overfitting strategy for testing the adequacy of the chosen AR(1)
mmodel.

Which model do you think, given these results, is the most appropriate for the data?
a. An AR(1)
b. An AR(2)
c. An ARMA(2,1)
d. The appropriate response to this set of diagnostic results would be to go back to the identification
stage and propose a larger model
26. Which of the following statements are true concerning the class of ARIMA(p,d,q) models?
(i) The “I” stands for independent
(ii) An ARIMA(p,1,q) model estimated on a series of logs of prices is equivalent to an ARIMA(p,0,q)
model estimated on a set of continuously compounded returns
(iii) It is plausible for financial time series that the optimal value of d could be 2 or 3.
(iv) The estimation of ARIMA models is incompatible with the notion of cointegration
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i), (ii), and (iii) only
d. (i), (ii), (iii), and (iv).
27. Which of the following statements is true concerning forecasting in econometrics?
Forecasts can only be made for time-series data
Mis-specified models are certain to produce inaccurate forecasts
Structural forecasts are simpler to produce than those from time series models
In-sample forecasting ability is a poor test of model adequacy
28. If a series, y, follows a random walk, what is the optimal one-step ahead forecast of y?
a. The current value of y
b. zero
c. one
d. The average value of y over the in-sample period
29. If a series, y, follows a random walk with drift b, what is the optimal one-step ahead forecast of the
change in y?
a. The current value of y
b. zero
c. one
d. The average value of the change in y over the in-sample period
30. An “ex ante” forecasting model is one which
a. Includes only contemporaneous values of variables on the RHS
b. Includes only contemporaneous and previous values of variables on the RHS
c. Includes only previous values of variables on the RHS
d. Includes only contemporaneous values of exogenous variables on the RHS
31. Consider the following MA(2) model
yt = 0.3 + 0.5ut-1 - 0.4ut-2 + ut
What is the optimal two-step ahead forecast from this model, made at time t, if the values of the
residuals from the model at time t and t-1 were 0.6 and –0.1 respectively and the values of the actual
series y at time t-1 was –0.4?
a. 0
b. 0.3
c. 0.24
d. 0.64
32. What is the optimal three-step ahead forecast from the MA(2) model given in question 31?
a. 0
b. 0.3
c. 0.24
d. 0.64
33. Which of the following statements are true concerning the estimation and forecasts of an
exponential smoothing model, St = a yt + (1-a) St-1?
(i) Using the standard notation, the larger the value of a, the less weight is attached to more recent
observations
(ii) If a = 0, there will be no updating as new observations become available
(iii) The one-step ahead forecast only from an exponential smoothing model will be the most recently
available smoothed value
(iv) If a = 1, the model is equivalent to a random walk for the series y
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i), (ii), and (iii) only
d. (i), (ii), (iii), and (iv).
34. Which one of the following statements is true concerning alternative forecast accuracy measures?
a. Mean squared error is usually highly correlated with trading rule profitability
b. Mean absolute error provides a quadratic loss function
c. Mean absolute percentage error is a useful measure for evaluating asset return forecasts
d. Mean squared error penalises large forecast errors disproportionately more than small forecast errors
35. Which one of the following factors is likely to lead to a relatively high degree of out-of-sample
forecast accuracy?
a. A model that is based on financial theory
b. A model that contains many variables
c. A model whose dependent variable has recently exhibited a structural change
d. A model that is entirely statistical in nature with no room for judgmental modification of forecasts

CHAPTER 7
1. In the context of simultaneous equations modelling, which of the following statements is true
concerning an endogenous variable?
a. The values of endogenous variables are determined outside the system
b. There can be fewer equations in the system than there are endogenous variables
c. Reduced form equations will not contain any endogenous variables on the RHS
d. Reduced form equations will contain only endogenous variables on the RHS
2. If OLS is applied separately to each equation that is part of a simultaneous system, the resulting
estimates will be
Unbiased and consistent
Biased but consistent
Biased and inconsistent
It is impossible to apply OLS to equations that are part of a simultaneous system
3. Which of the following statements are true concerning a triangular or recursive system?
(i) The parameters can be validly estimated using separate applications of OLS to each equation
(ii) The independent variables may be correlated with the error terms in other equations
(iii) An application of 2SLS would lead to unbiased but inefficient parameter estimates
(iv) The independent variables may be correlated with the error terms in the equations in which they
appear as independent variables
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i), (ii), and (iii) only
d. (i), (ii), (iii), and (iv).
4. Consider the following system of equations (with time subscripts suppressed and using standard
notation)

According to the order condition, the first equation is

a. Unidentified
b. Just identified
c. Over-identified
d. It is not possible to tell whether the equation is identified since the question does not give the
reduced form models
5. Consider again the system of equations in question 4. According to the order condition, the second
equation is
a. Unidentified
b. Just identified
c. Over-identified
d. It is not possible to tell whether the equation is identified since the question does not give the
reduced form models
6. Consider again the system of equations in question 4. Which estimation method, if any, can be used
for the third equation in the system:
(i) OLS
(ii) 2SLS
(iii) ILS
a. (ii) only
b. (ii) and (iii) only
c. (i), (ii), and (iii)
d. The coefficients cannot be validly estimated using any method
7. The order condition is
a. A necessary and sufficient condition for identification
b. A necessary but not sufficient condition for identification
c. A sufficient but not necessary condition for identification
d. A condition that is nether necessary nor sufficient for identification
8. A Hausman test would be used for
a. Determining whether an equation that is part of a simultaneous system is identified
b. Determining whether a simultaneous framework is needed for a particular variable
c. Determining whether 2SLS or ILS is optimal
d. Determining whether the structural form equations can be obtained via substitution from the
reduced forms
9. Which of the following estimation techniques are available for the estimation of over-identified
systems of simultaneous equations?
(i) OLS
(ii) ILS
(iii) 2SLS
(iv) IV
a. (iii) only
b. (iii) and (iv) only
c. (ii), (iii), and (iv) only
d. (i), (ii), (iii) and (iv)
10. Which of the following are advantages of the VAR approach to modelling the relationship between
variables relative to the estimation of full structural models?
(i) VARs receive strong motivation from financial and economic theory
(ii) VARs in their reduced forms can be used easily to produce time-series forecasts
(iii) VAR models are typically highly parsimonious
(iv) OLS can be applied separately to each equation in a reduced form VAR
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i), (ii), and (iii) only
d. (i), (ii), (iii), and (iv).
11. How many parameters will be required to be estimated in total for all equations of a standard form,
unrestricted, tri-variate VAR(4), ignoring the intercepts?
a. 12
b. 4
c. 3
d. 36
12. Which one of the following statements is true concerning VARs?
a. The coefficient estimates have intuitive theoretical interpretations
b. The coefficient estimates usually have the same sign for all of the lags of a given variable in a given
equation
c. VARs often produce better forecasts than simultaneous equation structural models
d. All of the components of a VAR must be stationary before it can be used for forecasting
13. Suppose that two researchers, using the same 3 variables and the same 250 observations on each
variable, estimate a VAR. One estimates a VAR(6), while the other estimates a VAR(4). The determinants
of the variance-covariance matrices of the residuals for each VAR are 0.0036 and 0.0049 respectively.
What is the values of the test statistic for performing a test of whether the VAR(6) can be restricted to a
VAR(4)?
a. 77.07
b. 0.31
c. 0.33
d. 4.87
14. Consider again the VARs that were discussed in question 13. What is the number of degrees of
freedom for the critical value for testing the restriction?
a. 3
b. 6
c. 9
d. 18
15. Suppose now that a researcher wishes to use information criteria to determine the optimal lag
length for a VAR. 500 observations are available for the bi-variate VAR, and the values of the
determinant of the variance-covariance matrix of residuals are 0.0336, 0.0169, 0.0084, and 0.0062 for 1,
2, 3, and 4 lags respectively. What is the optimal model order according to Akaike’s information
criterion?
a. 1 lags
b. 2 lags
c. 3 lags
d. 4 lags
16. Consider the following bivariate VAR(2) model:

Which one of the following conditions must hold for it to be said that Granger causality runs from y1 to
y2 only?
a. The b coefficients significant and the d coefficients insignificant
b. The d coefficients significant and the b coefficients insignificant
c. The a coefficients significant and the c coefficients insignificant
d. The c coefficients significant and the a coefficients insignificant
17. Consider again the VAR model of equation 16. Which of the following conditions must hold for it to
be said that there is bi-directional feedback?
a. The b and d coefficients significant and the a and c coefficients insignificant
b. The a and c coefficients significant and the b and d coefficients insignificant
c. The a and c coefficients significant
d. The b and d coefficients significant
18. Which of the following statements is true concerning variance decomposition analysis of VARs?
(i) Variance decompositions measure the impact of a unit shock to each of the variables on the VAR
(ii) Variance decompositions can be thought of as measuring the proportion of the forecast error
variance that is attributable to each variable
(iii) The ordering of the variables is important for calculating impulse responses but not variance
decompositions
(iv) It is usual that most of the forecast error variance for a given variable is attributable to shocks to that
variable
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i), (ii), and (iii) only
d. (i), (ii), (iii), and (iv).
19. What problems may arise if standard unit root tests are used in the presence of structural breaks in a
time series?
The tests may lack power
The tests may be oversized
The tests may fail to reject the null hypothesis when it is incorrect
All of (a) to (c) could potentially apply

CHAPTER 8
1. Which one of the following would NOT be a consequence of using non-stationary data in levels form?
a. The regression R² may be spuriously high
b. Test statistics may not follow standard distributions
c. Statistical inferences may be invalid
d. Parameter estimates may be biased
2. For a stationary autoregressive process, shocks will
a. Eventually die away
b. Persist indefinitely
c. Grow exponentially
d. Never occur
3. Consider the following model for yt:

Which one of the following most accurately describes the process for yt?
a. A unit root process
b. A stationary process
c. A deterministic trend process
d. A random walk with drift
4. If a series, yt is said to be integrated of order 2, which of the following statements is INCORRECT?
(i) It requires differencing twice to generate a stationary series
(ii) It contains exactly two unit roots
(iii) If the series is differenced three times, the resulting series will be stationary

(iv) A plausible model for the series would be

5. Which of the following are characteristics of a stationary process?
(i) It crosses its mean value frequently
(ii) It has constant mean and variance
(iii) It contains no trend component
(iv) It will be stationary in first difference form
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i), (ii), and (iii) only
d. (i), (ii), (iii), and (iv).
6. Consider the following two ways of expressing the Dickey-Fuller test regression:
Which one of the following restrictions must hold?

(i)

(ii)

(iii)

(iv)
7. Note that statistical tables are not necessary to answer this question. For a sample of 1000
observations, the Dickey-Fuller test statistic values are
a. More negative than (i.e. bigger in absolute value than) those in the left hand tail of a normal
distribution
b. Less negative than (i.e. smaller in absolute value than) those in the left hand tail of a normal
distribution
c. Obtained from an analytical formula for the density of the Dickey-Fuller distribution
d. More negative (i.e. bigger in absolute value) for a 10% size of test than a 5% test
8. The purpose of “augmenting” the Dickey-Fuller test regression is to
a. Ensure that there is no heteroscedasticity in the test regression residuals
b. Ensure that the test regression residuals are normally distributed
c. Ensure that there is no autocorrelation in the test regression residuals
d. Ensure that all of the non-stationarity is taken into account
9. Suppose that the following regression is conducted

and the test statistic takes a value of +3.2. What is the appropriate conclusion?
(i) yt is stationary
(ii) yt contains exactly one unit root
(iii) yt contains at least one unit root
(iv) yt contains exactly two unit roots
10. Suppose that the following Dickey-Fuller test regression is conducted

and the value of the test statistic is –6.3. What is the appropriate conclusion?
(i) yt is stationary
(ii) yt contains exactly one unit root
(iii) yt contains at least one unit root
(iv) yt contains exactly two unit roots
11. If two variables, xt and yt are said to be cointegrated, which of the following statements are true?
(i) xt and yt must both be stationary
(ii) Only one linear combination of xt and yt will be stationary
(iii) The cointegrating equation for xt and yt describes the short-run relationship between the two series
(iv) The residuals of a regression of yt on xt must be stationary
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i), (ii), and (iii) only
d. (i), (ii), (iii), and (iv).
12. If the Engle-Granger test is applied to the residuals of a potentially cointegrating regression, what
would be the interpretation of the null hypothesis?
a. The variables are cointegrated
b. The variables are not cointegratd
c. Both variables are stationary
d. Both variables are non-stationary
13. Consider the following model for yt:

Which of the following statements are true?

(i) The gamma terms measure the long-run relationship between y and x
(ii) The gamma terms measure the short-run relationship between y and x
(iii) Hypothesis tests cannot validly be conducted on the gamma terms
(iv) Hypothesis tests cannot validly be conducted on the beta terms
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i), (ii), and (iii) only
d. (i), (ii), (iii), and (iv).
14. Which of the following are disadvantages of the Dickey-Fuller / Engle-Granger approach to testing
for cointegration and modelling cointegrating relationships?
(i) Only one cointegrating relationship can be estimated
(ii) Particularly for small samples. There is a high chance of the tests suggesting that variables are not
cointegrated when they are
(iii) It is not possible to make inferences on the cointegrating regression
(iv) The procedure forces the researcher to specify which is the dependent variable and which are the
independent variables.
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i), (ii), and (iii) only
d. (i), (ii), (iii), and (iv).
15. What is the main difference between the Dickey Fuller (DF) and Phillips-Perron (PP) approaches to
unit root testing?
a. ADF is a single equation approach to unit root testing while PP is a systems approach
b. PP tests reverse the DF null and alternative hypotheses so that there is stationarity under the null
hypothesis of the PP test
c The PP test incorporates an automatic correction for autocorrelated residuals in the test regression
d. PP tests have good power in small samples whereas DF tests do not
16. Which one of the following criticisms of the Dickey-Fuller/Engle-Granger approach to dealing with
cointegrated variables is overcome by the Engle-Yoo (EY) procedure?
a. In the context of small samples, Dickey Fuller tests are prone to conclude that there is a unit root in a
series when there is not
b. The Engle-Granger (EG) approach can only detect up to one cointegrating relationship even though
there could be more than one
c. The variables are treated asymmetrically in the cointegrating tests
d. It is not possible to perform tests about the cointegrating relationship
17. What are the characteristic roots of the following matrix?
2 4
Π=
3 6
a. 0 and 8
b. 0 and 4
c. 2 and 4
d. 2 and 3
18. What is the rank of the pi matrix given in question 17?
a. 0
b. 1
c. 2
d. The rank cannot be calculated without being told the eigenvalues
19. An appropriate way to describe the pi matrix in question 17 would be to say that it is
a. Of full rank
b. A zero matrix
c. A singular matrix
d. A non-zero determinant matrix
20. Consider a system containing 4 variables, and where the Johansen test has been applied with the
following results:

r λmax 5% Critical
value

0 29.65 30.26

1 20.91 23.84

2 10.67 17.72

3  8.55 10.71

 a. 0
b. 1
c. 2
d. 3
21. If a Johansen “trace” test for a null hypothesis of 2 cointegrating vectors is applied to a system
containing 4 variables is conducted, which eigenvalues would be used in the test?
a. All of them
b. The largest 2
c. The smallest 2
d. The second largest
22. What problems may arise if the Perron (1989) procedure that allows for a known structural break is
used when testing for a unit root?
(i) The actual break date may not be known in advance and the procedure does not incorporate an
approach to determine the break date
(ii)  If the break date is determined by examining the data, then the critical values Perron derived will no
longer be appropriate
(iii) The test procedure can only allow for a break in the level of the series and not in the trend growth
rate
a. (i) only
b. (ii) only
c. (i) and (ii) only
d. All of (i), (ii) and (iii)

CHAPTER 11 12
1. Which of the following is a disadvantage of the fixed effects approach to estimating a panel model?
a. The model is likely to be technical to estimate
b. The approach may not be valid if the composite error term is correlated with one or more of the
explanatory variables
c. The number of parameters to estimate may be large, resulting in a loss of degrees of freedom
d. The fixed effects approach can only capture cross-sectional heterogeneity and not temporal variation
in the dependent variable
2. The “within transform” involves
a. Taking the average values of the variables
b. Subtracting the mean of each entity away from each observation on that entity
c. Estimating a panel data model using least squares dummy variables
d. Using both time dummies and cross-sectional dummies in a fixed effects panel model
3. Which of the following are advantages of the use of panel data over pure cross-sectional or pure time-
series modelling?
(i) The use of panel data can increase the number of degrees of freedom and therefore the power of
tests
(ii) The use of panel data allows the average value of the dependent variable to vary either cross-
sectionally or over time or both
(iii) The use of panel data enables the researcher allows the estimated relationship between the
independent and dependent variables to vary either cross-sectionally or over time or both
a. (i) only
b. (i) and (ii) only
c. (ii) only
d. (i), (ii), and (iii)
4. Consider the following equation and determine the class of model that it best represents:

a. An entity fixed effects model

b. A time fixed effects model
c. A random effects model
d. A pure time series model
5. The fixed effects panel model is also sometimes known as
a. A seemingly unrelated regression model
b. The least squares dummy variables approach
c. The random effects model
d. Heteroscedasticity and autocorrelation consistent
6. Which of the following is a disadvantage of the random effects approach to estimating a panel model?
a. The approach may not be valid if the composite error term is correlated with one or more of the
explanatory variables
b. The number of parameters to estimate may be large, resulting in a loss of degrees of freedom
c. The random effects approach can only capture cross-sectional heterogeneity and not temporal
variation in the dependent variable.
d. All of (a) to (c) are potential disadvantages of the random effects approach.
7. In order to determine whether to use a fixed effects or random effects model, a researcher conducts a
Hausman test. Which of the following statements is false?
a. For random effects models, the use of OLS would result in consistent but inefficient parameter
estimation
b. If the Hausman test is not satisfied, the random effects model is more appropriate
c. Random effects estimation involves the construction of “quasi-demeaned” data
d. Random effects estimation will not be appropriate if the composite error term is correlated with one
or more of the explanatory variables in the model
8. Which of the following statements is false concerning the linear probability model?
a. There is nothing in the model to ensure that the estimated probabilities lie between zero and one
b. Even if the probabilities are truncated at zero and one, there will probably be many observations for
which the probability is either exactly zero or exactly one
c. The error terms will be heteroscedastic and not normally distributed
d. The model is much harder to estimate than a standard regression model with a continuous dependent
variable
9. Suppose that we estimate a logit model based on an intercept and two explanatory variables and the
parameter estimates are respectively:

 and the average values of the explanatory variables are:

 A 1-unit increase in x3 will cause an increase in the probability that the outcome corresponding to y = 1
to:
a. Fall by 0.1
b. Fall by 0.2
c. Fall by 0.05
d. Increase by 0.3
10. Which of the following is correct concerning logit and probit models?
a. They use a different method of transforming the model so that the probabilities lie between zero and
one
b. The logit model can result in too many observations falling at exactly zero or exactly one
c. For the logit model, the marginal effect of a change in one of the explanatory variables is simply the
estimate of the parameter attached to that variable, whereas this is not the case for the probit model
d. The probit model is based on a cumulative logistic function
11. Suppose that we wished to evaluate the factors that affected the probability that an investor would
choose an equity fund rather than a bond fund or a cash investment. Which class of model would be
most appropriate?
a. A logit model
b. A multinomial logit
c. A tobit model
d. An ordered logit model
12. A dependent variable whose values are not observable outside a certain range but where the
corresponding values of the independent variables are still available would be most accurately described
as what kind of variable?
a. Censored
b. Truncated
c. Multinomial variable
d. Discrete choice
13. Which of the following statements will be true if the number of replications used in a Monte Carlo
study is small?
(i) The statistic of interest may be estimated imprecisely
(ii) The results may be affected by unrepresentative combinations of random draws
(iii) The standard errors on the estimated quantities may be unacceptably large
(iv) Variance reduction techniques can be used to reduce the standard errors
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i), (ii), and (iii) only
d. (i), (ii), (iii), and (iv).
14. Under which of the following situations would bootstrapping be preferred to pure simulation?
(i) If it is desired that the distributional properties of the data in the experiment are the same as those of
some actual data
(ii) If it is desired that the distributional properties of the data in the experiment are known exactly
(iii) If the distributional properties of the actual data are unknown
(iv) If the sample of actual data available is very small
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i), (ii), and (iii) only
d. (i), (ii), (iii), and (iv).
15. Which of the following statements are correct concerning the use of antithetic variates as part of a
Monte Carlo experiment?
(i) Antithetic variates work by reducing the number of replications required to cover the whole
probability space
(ii) Antithetic variates involve employing a similar variable to that used in the simulation, but whose
properties are known analytically
(iii) Antithetic variates involve using the negative of each of the random draws and repeating the
experiment using those values as the draws
(iv) Antithetic variates involve taking one over each of the random draws and repeating the experiment
using those values as the draws
a. (ii) and (iv) only
b. (i) and (iii) only
c. (i), (ii), and (iii) only
d. (i), (ii), (iii), and (iv).
16. Suppose we have a panel of data with T = 250 and N = 2. What would be the most appropriate
procedure to test for unit roots?
a. A panel unit root test with common alternative hypotheses
b. A panel unit root test allowing for heterogeneous processes under the alternative hypothesis
c. A panel unit root test allowing for heterogeneous processes under the null hypothesis
d. Separate unit root tests on each individual time series
17. Panel unit root tests with common alternative hypotheses assume:
a. Each series may follow a separate stochastic process under the alternative hypothesis
b. Each series must follow the same stochastic process under the alternative hypothesis
c. Each series has the same intercept and deterministic trend growth rate, if these are included in the
model
d. Each series has a unit root under the alternative hypothesis