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EXAMINATION
AFF700
Advanced Research Methods in Finance

Date 2023-01-09
Time 08.30 – 12.30
Examiner Urban Gråsjö
Teacher Urban Gråsjö
Visit No
Phone 0704614753
Aids Calculator, Textbook: Brooks, Introductory Econometrics for Finance (a printed
version of the textbook is allowed)
Questions 5
Max points 60
Grade Levels A: 54p, B: 48p, C: 42p, D: 36p, E: 30p
Date for Result latest 2023-01-27

Note: Write your anonymous code on each page!!

Good Luck!

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Question 1: 25p
This problem consists of 25 multiple choice questions. Each correct answer gives 1 point,
wrong answers give 0 points. There is only one correct choice per question. You do not need
to motivate the answers!

1. Assume that the relationship between a company’s stock price (y) and dividends paid per
share (x) is linear. If the slope of the equation is 0.60 and the intercept is 40, what would be
the expected stock price if the dividend paid was 3?
A. 41.8
B. 43.6
C. 40.6
D. 40.

2. Consider the following two graphs:

(A) (B)
Which of the following statements is true if A represents a normal distribution?
(I) The skewness of the distribution plot A is 0 and its kurtosis is 3
(II) The skewness of the distribution plot B is 0 and its kurtosis is 3
(III) The excess kurtosis of the distribution plot A is 3
(IV) The excess kurtosis of the distribution plot B is 0.
A. Both (I) and (III) are true
B. Only (III) is true
C. Only (I) is true
D. Both (I) and (IV) are true.

3. Suppose that the following regression is conducted

and the test statistic takes a value of +3.2. What is the appropriate conclusion?
A. yt is stationary
B. yt contains exactly one unit root
C. yt contains at least one unit root
D. yt contains exactly two unit roots

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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. Which of these is NOT a reason for adding a disturbance term to a regression model
yt =  +  xt + ut ?
A. Some determinants of the effect variable may be omitted from the model
B. Some determinants of the effect variable may be unobservable
C. Some determinants of the independent variable may be omitted from the model
D. There may be errors in the way that the dependent variable is measured which cannot
be modelled.

6. The following regression is estimated on 64 observations:

yt = 1 + 2X2t + 3X3t + 4X4t + ut
Which of the following null hypotheses could we test using an F-test?
(i) 2 = 0
(ii) 2 = 1 and 3 + 4 = 1
(iii) 34 = 1
(iv) 2 -3 -4 = 1.
A. (i) and (ii) only
B. (ii) and (iv) only
C. (i), (ii), (iii), and (iv)
D. (i), (ii), and (iv) only.

7. 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.

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8. 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

9. 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 a coefficients significant and the c coefficients insignificant
B. The c coefficients significant and the a coefficients insignificant
C. The b coefficients significant and the d coefficients insignificant
D. The d coefficients significant and the b coefficients insignificant

10. Consider the following time series model applied to daily data:

where rt are the returns, and D1, D2, D3 and D4 are dummy variables. D1 = 1 on
Monday and zero otherwise; D2 = 1 on Tuesday and zero otherwise, …, D4 = 1 on
Thursday and zero otherwise. What is the interpretation of the parameter estimate for
the intercept?
A. It is the average return on Monday
B. It is the average return on Friday
C. It is the Monday deviation from the mean return for the week
D. It is the Friday deviation from the mean return for the week

11. Assume that the relationship between a company’s stock price (y) and dividends paid per
share (x) is linear. If the slope of the equation is 0.60 and the intercept is 40, what would be
the expected stock price if the dividend paid was 0?

A. 41.8
B. 43.6
C. 40.6
D. 40.

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12. Suppose you have calculated the following regression results:

yˆ = 1.25 + 0.64 x . The standard errors of ̂ and ˆ are 1.22 and 0.512, respectively. Using
t t

the test of significance approach, what is the test statistic value of a hypothesis to test
whether the true value of  statistically different from zero?
A. 0.95
B. 1.25
C. 2.56
D. Cannot say without more information.

13. Which of the following would NOT be a potential remedy for the problem of
multicollinearity between regressors?
A. Removing one of the explanatory variables
B. Transforming the data into logarithms
C. Transforming two of the explanatory variables into ratios
D. Collecting higher frequency data on all of the variables.

14. What is the long-run solution to the following econometric model?

yt = 1 + 2X2t + 3X3t + ut
A. y = 1 + 2X2
B. y = 1 + 2X2 + 3X3
C. y = - (2/ 1) X2 - (3 / 1)X3
D. There is no long-run solution to this equation.

15. Which one of the following is NOT a symptom of near multicollinearity?

A. The R2 value is high
B. The regression results change substantively when one particular variable is deleted
C. Confidence intervals on parameter estimates are narrow
D. Individual parameter estimates are insignificant.

16. Assuming you are interested in conducting a Goldfeld–Quandt test at a 5% significance

level and the regression model is estimated on each sub-sample with residual variances
s12 = 0.15 and s22 = 0.14 , T1 = 12 , T2 = 14 and k = 2. What would your conclusion be?
A. Do not reject the null hypothesis of homoscedasticity.
B. Do not reject the null hypothesis of heteroscedasticity
C. Reject the null hypothesis of homoscedasticity
D. Reject the null hypothesis of heteroscedasticity

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17. Which of the following would NOT be a potential remedy for the problem of
multicollinearity between regressors?
A. Removing one of the explanatory variables
B. Transforming the data into logarithms
C. Transforming two of the explanatory variables into ratios
D. Collecting higher frequency data on all of the variables.

18. In a time-series regression of the excess return of a mutual fund on a constant and the excess
return on a market index, which of the following statements should be true for the fund manager
to be considered to have ‘beaten the market’ in a statistical sense?
A. The estimate for  should be negative and statistically significant
B. The estimate for  should be positive and statistically significantly greater than the risk-
free rate of return
C. The estimate for  should be positive and statistically significant
D. The estimate for  should be positive and statistically significant.

19. Which of the following would you expect to be a problem associated with adding lagged
values of the dependent variable into a regression equation?
A. The assumption that the regressors are non-stochastic is violated
B. A model with many lags may lead to residual non-normality
C. Adding lags may induce multicollinearity with current values of variables
D. The standard errors of the coefficients will fall as a result of adding more explanatory
variables.

20. Is the following process yt = 3 yt −1 − 2.75 yt −2 + 0.75 yt −3 + ut stationary?

A. Yes
B. Partly stationary
C. No
D. Cannot say without more information.

21. Assume that you are trying to model the relationship between house prices and rents. If
you find that both series are non-stationary and a linear combination of the two series is
stationary, which of the following is true?
(I) Regressing the levels of house prices on the levels of rents could lead to spurious
regressions
(II) House prices and rents are cointegrated
(III) An appropriate linear combination of house prices and rents is I(1)
(IV) House prices and rents are not cointegrated.
A. I only
B. I and II only
C. I, II, and III only
D. I, II, III, and IV only.

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22. Consider the following picture and suggest the model from the following list that best
characterises the process:
0.9

0.8
acf
pacf
0.7

0.6

0.5
acf and pacf

0.4

0.3

0.2

0.1

0
1 2 3 4 5 6 7 8 9 10
-0.1
Lags

A. An AR(1)
B. An AR(2)
C. An ARMA(1,1)
D. An MA(3).

23. To induce stationarity in a deterministic trend-stationary process

A. Regress the non-stationary series on the time trend and use the residuals
B. Difference the series once
C. Difference the series twice
D. No action is necessary because the process is already stationary.

24. Suppose that a researcher wanted to obtain an estimate of realised (‘actual’) volatility.
Which one of the following is likely to be the most accurate measure of volatility of stock
returns for a particular day?
A. The price range (high minus low) on that day
B. The squared return on that day
C. The sum of the squares of hourly returns on that day
D. The squared return on the previous day.

25. Which of the following is the most plausible test regression for determining whether a
series y contains ‘ARCH effects’?
A. yt2 =  0 + 1 y t −1+ 2 y t − 2 + 3 y t − 3 + 4 y t − 4 + 5 y t − 5 +ut
B. yt2 = 0 + 1 yt −1 +2 yt − 2 +3 yt −3 +4 yt − 4 +5 yt −5 +ut
2 2 2 2 2

C. yt = 0 + 1 yt −1 +2 yt − 2 +3 yt −3 +4 yt − 4 +5 yt −5 +ut

2 2 2 2 2

D. yt = 0 + 1 yt −1 +2 yt − 2 +3 yt −3 +4 yt − 4 +5 yt −5 +ut .

2 3 4 5 6

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Answers, Problem 1

A B C D
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.

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Question 2: 10p
Which of the following models can be estimated (following a suitable rearrangement if
necessary) using ordinary least squares (OLS), where X, y, Z are variables and α, β, γ are
parameters to be estimated? You need to explain your answer for each model!
yt = α + βxt + ut (1)
yt = eα xt β eut (2)
yt = α + βγ xt + ut (3)
ln(yt) = α + β ln(xt) + ut (4)
yt = α + βxt zt + ut (5)

Question 3: 12p
a) The following table shows the sample ACF and PACF from 400 observations on Xt:

Lag 1 2 3 4 5
ACF 0.81 0.65 0.54 0.42 0.08
PACF 0.81 0.01 0.02 -0.07 -0.06

Based on these sample statistics, is it reasonable to assume that Xt is a white noise

process? If not, what might a suitable model for Xt be? Justify your choice of model.
(Note that, for the standard normal distribution, the point having probability to the
right of it is 1.96).

b) Use both the Box–Pierce and Ljung–Box statistics to test the joint null hypothesis that
the first five autocorrelation coefficients are jointly zero.

Question 4: 3p
Calculate the long-run static equilibrium solution to the following econometric model:

∆yt = β1 + β2∆x2t + β3∆x3t + β4yt−1 + β5x2t−1 + β6x3t−1 + β7x3t−4 + ut

Question 5: 10p
Assume a VAR(2) with two stationary time series variables, Xt and Yt.

Yt =  1 +  11Yt −1 +  12Yt −2 + 11 X t −1 + 12 X t −2 +  1t + e1t .

X t =  2 +  21Yt −1 +  22Yt −2 +  21 X t −1 +  22 X t −2 +  2 t + e1t .

a) Describe if and how this VAR(2) can be used to test for Granger causality.
b) How would your answer to part a) change if X and Y had unit roots and were
cointegrated?

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