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Gra 65151 - 201820 - 06.12.2018 - QP
Gra 65151 - 201820 - 06.12.2018 - QP
GRA 65151
Quantitative Methods for Finance
Department of Finance
Start date: 06.12.2018 Time 09.00
Finish date: 06.12.2018 Time 12.00
For the following questions use α 0.05 as your significance level and present your results with
4 digits after the decimal point. For hypothesis testing, no tabulated percentiles of distributions
will be provided. State explicitly the decision rule and formula to compute necessary critical
values.
(a) Calculate the sample mean, variance, and standard deviation for X and for Y . (2 points)
(b) Calculate the sample covariance and the correlation between X and Y . Is this correlation
statistically significant? Describe precisely how you test it. (3 points)
(c) For a regression model Yi β0 β1 Xi ui , find the coefficient of determination. Interpret
your results. (2 points)
(d) Find the total variation, explained variation, and unexplained variation of Y . (2 points)
(e) Calculate the estimates β̂0 and β̂1 for the regression Yi β0 β1 Xi ui . (3 points)
(f) Find standard errors of the estimates. What can you say about the significance of β0 and
β1 ? (5 points)
(g) Show how you can use F-test to test the significance of β1 . Compute the test statistic and
state the decision rule. (7 points)
(h) Explain why it is important to include a constant into a regression model. Derive β̂1nc ,
that is, the slope coefficient in the no-constant version of the regression Yi β1nc Xi ui .
Compute β̂1 β̂1nc . (7 points)
(i) Do the two time series in your analysis have statistically different volatilities? Describe
precisely how you test it. (3 points)
(j) On average, is delinquency rate on loans statistically different from the net percentage of
banks tightening their lending standards? Describe precisely how you test it and explain
your choice of the test. (5 points)
2
context of a set of US firms that had been newly listed on the stock market in 1983, with their
additional funding decisions being tracked over the 1984-92 period. A core objective of the paper
is to determine the factors that affect the probability of raising external financing. As such, the
dependent variable will be binary that is, a column of ones (firm raises funds externally) and
zeros (firm does not raise any external funds).
(a) Given that the interest rate is equal to 11%, the present value of a prize that brings $20,000
per year forever with the first payment at the end of the forth year and continuous com-
pounding of interest is higher than the present value of a prize that pays $60,000 every
three years (paid out at the end of a three-year period) for the next 15 years (5 payments
in total).
(b) The multiplication rule for probabilities P pAB q P pA|B qP pB q can be applied for inde-
pendent events A and B.
(c) To compute the sample variance we divide the sum of squared deviations from the mean
by n 1 to make the estimator consistent.
3
(d) A regression model where individual slope coefficients are insignificant and R2 is equal to
90% suffers from near-multicollinearity.
(e) The Poisson distribution is often used to model the dynamics of a stock price.
(f) Bootstrap might be ineffective for linear regressions when the error terms are heteroskedastic
or autocorrelated.
(g) The model yt eα xβt eut cannot be estimated using OLS. Here, yt , xt are data series and α
and β are parameters to be estimated.
(h) To identify key characteristics of individuals applying for bank loans, a researcher obtains
anonymized data from the largest bank in the country. These data contain extensive in-
formation about customers that currently have an outstanding loan from the bank. The
researcher is right to treat the data as a simple random sample.
(i) The best way to study the wealth distribution in the world is to collect a large random
sample from the population.
(j) One of the reasons of the conditional heteroskedasticity in error terms is that the regression
model omits an important variable which is persistent.
(k) We can use Monte Carlo simulations to compute an integral of a function.
05: r = 1000;
06: X = zeros(r,1);
07: for b=1:r
08: data b = datasample([smb hml],n,’Replace’,true);
09: X(b,1) = corr(data b(:,1),data b(:,2));
10: end
11:se b = std(X);
12:q = norminv(0.975,0,1);
13:int 1 = [mean(X)-q*std(X); mean(X)+q*std(X)];
14:int 2 = [prctile(X,2.5); prctile(X,97.5)];
Here smb and hml are Fama-French size and value factors.
(a) Explain what the code in lines 1 to 4 does. In general, what is the difference between
correlation and regression analysis? (3 points)
(b) Explain what the code in lines 5 to 10 does. What is the objective of this method? (5 points)
(c) Explain the code in lines 11–14. What statistic is computed in lines 13–14? Do you expect
the values of the variables int 1 and int 2 to be similar? Why?(5 points)
(d) How can you use the values of the variables int 1 and int 2 to test the significance of the
correlation coefficient? (3 points)
4
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