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?
Nominal
2. The price of a house is best described as what type of number?
Cardinal
3. Which of the following is NOT a feature of continuously compounded returns (i.e. log-returns)?
They can be added across a portfolio of assets to give portfolio returns
4. Suppose that observations are available on the monthly bond prices of 100 companies for 5 years. What type of data
are these?
Panel
5. The score associated with a credit rating is best described as a/an:
Ordinal 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:
Nominal number
7. The yield to maturity on a bond is best described as a/an:
Cardinal number
8. A share price is quoted in units of pennies. Which term best describes this sort of data?
Discrete
9. Which of the following statements is FALSE concerning log-price relatives (log returns)?
They can be validly averaged cross-sectionally
10. Which of the following statements is TRUE concerning simple returns?
They can be validly averaged cross-sectionally
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:
7%
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:
9%
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%?
56%
2. Given the scenario in question 1, How many stocks would be required to achieve a volatility of 10%?
64
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?
5.6
4. The point at which a function crosses the x-axis is called:
A root
5. If the relationship between two variables is y = 3x3 + 2x2 + x – 6, what is the functional form that links them?
Non-linear
6. If the relationship between two variables is y = –4x + 2, what is the functional form that links them?
Linear
7. If we plot the relationship y = a + bx on a graph, what will be the interpretation of a?
The point where the line crosses the y-axis
8. If we know that relationship y = a + bx yields a horizontal line, which restriction must hold?
B=0
9. If we know that relationship y = a + bx yields a line at 45 degrees to the x-axis, which restriction must hold?
B=1
10. Which type of function y plotted against x always has a gradient that is increasing in x?
An exponential function
11. A cubic function, y = f(x) will have how many UNIQUE roots?
At most three

12. Which shape will be the function y = –3 + 2x – x2?

(i) Always upward sloping

(ii) Always downward sloping

(iii) U-shaped

(iv) ∩-shaped
IV
13. What are the roots of the equation y = x2 – 9x?
0.3 and 9
14. A plot of the function y = log(x) will:
Cross the x-axis at one

15. Another way of writing log(x + y) is:

None of the above apply
16. Log(0) is:
Undefined

17. Writing out all the terms in the expression would lead to:
(i) 3x3
(ii) x3
(iii) 27x3
(iv) 27x

III

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

I,II and IV
19. The derivative of y = 1/x is: 1/x2
20. The derivative of 5log(x) is: 5/x
21. The second derivative of 8x2 is: 16
22. The second derivative of -4x is: 0
23. The partial derivative of 6x2 + 2x + 3xy + 4y – 2y2 with respect to y is: 3x+4-4y

24. What are the dimensions of the matrix : 2x3

25. Which of the following is an identity matrix?

(i) (1)

(ii)

(iii)

(iv)

I
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 row vector
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 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?
This matrix multiplication is undefined.

29. The inverse of the matrix is:

(i)

(ii)

(iii)
(iv) Undefined

III

30. The matrix is:

(i) Square

(ii) Singular

(iii) Non-invertible
(iv) Of full rank

I;II;III
31. The determinant of a singular matrix will be: 0

32. What are the eigenvalues of the matrix ? 0 and 1

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

I and III

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

I and III
3. Which of the following statements is TRUE concerning the standard regression model?
Y has a probality distribution
4. Which of the following statements is TRUE concerning OLS estimation?
OLS minimises the sum of the squares of the vertical distances from the points to the line
5. The residual from a standard regression model is defined as
The difference between the actual value, y, and the fitted value, y-hat

6. Which one of the following statements best describes the algebraic representation of the fitted regression line?

(i)
(ii)

(iii)

(iv)

II
7. Which of the following statements concerning the regression population and sample is FALSE?
In theory, the sample could be larger than the population
8. Which of the following statements is true concerning the population regression function (PRF) and sample regression
function (SRF)?
The PRF is a description of the process thought 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)

I,II,III,IV
10. Which of the following is an equivalent expression for saying that the explanatory variable is “non-stochastic”?
The explanatory variable is fixed in repeated samples
11. If an estimator is said to be consistent, it is implied that
The estimates will converge upon the true values as the sample size increases
12. If an estimator is said to have minimum variance, which of the following statements is NOT implied?
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.

I,II,III,IV

14. Which of the following statements is INCORRECT concerning the classical hypothesis testing framework?

If the null hypothesis is rejected, the alternative is accepted

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.

I, III

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 H1: 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

II

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.
I

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?

(-5.46,2.86)

19. Which one of the following is the most appropriate definition of a 99% confidence interval?

99% of the time in repeated samples, the interval would contain the true value of the parameter

20. Which one of the following statements best describes a Type II error?

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 n

I,II,III

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 H0: β3 = 1?
2.06

2. Under the matrix notation for the classical linear regression model, y = Xβ + u, what are the dimensions of u?

Tx1

4. Consider the following statistics calculated from the raw data:

for the model estimated using 30 monthly observations.

What is the estimate for β3?

0.01

3. What are the dimensions of û'û?

1x1

5. Consider the following statistics calculated from the raw data:

for the model estimated using 30 monthly observations.

What is the estimate for the standard error for β2?

0.12

6. Consider the following statistics calculated from the raw data:

for the model estimated using 30 monthly observations.

What is the test statistic resulting from a test of the null hypothesis that the true value of the intercept coefficient is zero?

-0.09

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?

Retain the intercept

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?

No

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)

III

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
I and III

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 H0: β2 + β3 = 1?] what would be the relevant critical value from the statistical
tables with which to compare the test statistic?
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 H0: β2 + β3= 1?] and the two required residual sums of squares are 30.2 and
28.1, what is the F-test statistic?
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
I

14. Which one of the following is examined by looking at a goodness of fit statistic?

How well the sample regression function fits the data

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.

I,II,III

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.
I and III

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.

II

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.
iII

19. Which of the following is not an advantage of quantile regressions compared with standard OLS?

Quantile regressions do not require the homoscedasticity assumption

20. What does a quantile regression measure?

The entire distribution of y given the distributions of the explanatory variables

21. The parameters of a quantile regression function are estimated by:

Minimising the sum of the weighted absolute values of the 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)

(i), (ii), and (iii) only

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.

I,II,III,IV

3. What is the meaning of the term “heteroscedasticity”?

The variance of the errors is not constant

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)

II

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?
9.24

6. What would be then consequences for the OLS estimator if heteroscedasticity is present in a regression model but
ignored?

It will be inefficient

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.

I,II,III

8. Negative residual autocorrelation is indicated by which one of the following?

An alternating pattern in the residuals

9. Which of the following could be used as a test for autocorrelation up to third order?

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?

Close to 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?

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)

III

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

(ii) and (iv) only

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.

(ii) and (iv) only

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

(i), (ii), and (iii) only

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?

Biased but consistent coefficient estimates

17. Near multicollinearity occurs when

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?

Take logarithms of each of the variables

19. What will be the properties of the OLS estimator in the presence of multicollinearity?

It will be consistent, unbiased and efficient

20. Which one of the following is NOT an example of mis-specification of functional form?

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?

Test statistics concerning the parameters will not follow their assumed distributions

22. A leptokurtic distribution is one which

Has fatter tails and is more peaked at the mean than a normal distribution with the same mean and variance

23. Under the null hypothesis of a Bera-Jarque test, the distribution has

Zero skewness and a kurtosis of three

24. Which one of the following would be a plausible response to a finding of residual non-normality?

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?

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?

8.6

27. What would be the appropriate 5% critical value for the test described in questions 25 and 26? [
]

2.6

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?

The RSS for the long sub-sample regression

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?

8.3

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.

I, III

31. A parsimonious model is one that

Includes as few variables as possible to explain the data

32. An overparameterised model is one that

Includes too many variables

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?

The final model may lack theoretical interpretation

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

(i), (ii), and (iii) only

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

(iv) only

CHAPTER 6:

1. Which of the following is a typical characteristic of financial asset return time-series?

They have no trend

2. Which of the following is a DISADVANTAGE of using pure time-series models (relative to structural models)?

They are not theoretically motivated

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

(i), (ii), and (iii) only

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

(i), (ii), and (iii) only

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?

1 and 2 only

6. Consider again the autocorrelation coefficients described in question 5. The value of the Box-Pierce Q-statistic is

18.12

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?

The Q test has better small-sample properties than the Q*.

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

II,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?

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

The roots of the characteristic equation must all lie outside the unit circle

11. Consider the following AR(2) process:

yt = 1.5 yt-1 - 0.5 yt-2 + ut

This is a

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

0.33

13. The (unconditional) variance of the AR(1) process for y given in question 12 will be

1.19

14. The value of the autocovariance function at lag 3 for the AR(1) model given in question 12 will be

0.076

15. The value of the autocorrelation function at lag 3 for the AR(1) model given in question 12 will be

0.064

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

I,II,III

17. An ARMA(p,q) (p, q are integers bigger than zero) model will have

An acf and pacf that both decline geometrically

18. The pacf is necessary for distinguishing between

An AR and an ARMA model

19. The characteristic roots of the MA process

yt = -3ut-1 + ut-2 + ut
are
1 and 0.5

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

An AR(2)

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

An MA(2)

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

(i), (ii), and (iii) only

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

(ii) and (iv) only

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

(i) and (iii) only

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?
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

(ii) and (iv) only

27. Which of the following statements is true concerning forecasting in econometrics?
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?
The current value of y
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?
The average value of the change in y over the in-sample period
30. An “ex ante” forecasting model is one which
Includes only previous values of 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?

0.24
32. What is the optimal three-step ahead forecast from the MA(2) model given in question 31?
0.3

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

(ii) and (iv) only
34. Which one of the following statements is true concerning alternative forecast accuracy measures?
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 model that is based on financial theory

CHAPTER 7
1. In the context of simultaneous equations modelling, which of the following statements is true concerning an
endogenous variable?
Reduced form equations will not contain any 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
Biased and inconsistent

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

(i), (ii), and (iii) only

4. Consider the following system of equations (with time subscripts suppressed and using standard notation)

According to the order condition, the first equation is

Unidentified

5. Consider again the system of equations in question 4. According to the order condition, the second equation is

Just identified
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

(i), (ii), and (iii)

7. The order condition is

A necessary but not sufficient condition for identification

8. A Hausman test would be used for

Determining whether a simultaneous framework is needed for a particular variable

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

(iii) and (iv) only

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

(ii) and (iv) only

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?

36

12. Which one of the following statements is true concerning VARs?

VARs often produce better forecasts than simultaneous equation structural models

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)?

77.07

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?

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?

3 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?

The d coefficients significant and the b 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?

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

(ii) and (iv) only

19. What problems may arise if standard unit root tests are used in the presence of structural breaks in a time series?

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?

Parameter estimates may be biased

2. For a stationary autoregressive process, shocks will

Eventually die away

3. Consider the following model for yt:

Which one of the following most accurately describes the process for yt?
A deterministic trend process

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

IV
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

(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)

II

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

More negative than (i.e. bigger in absolute value than) those in the left hand tail of a normal distribution

8. The purpose of “augmenting” the Dickey-Fuller test regression is to

Ensure that there is no autocorrelation in the test regression residuals

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
III

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
I

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
(ii) and (iv) only

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?

The variables are not cointegrated

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

(i) and (iii) only

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.

(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?

The PP test incorporates an automatic correction for autocorrelated residuals in the test regression

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?

It is not possible to perform tests about the cointegrating relationship

17. What are the characteristic roots of the following matrix?

0 and 8

18. What is the rank of the pi matrix given in question 17?

19. An appropriate way to describe the pi matrix in question 17 would be to say that it is

A singular 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

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?

The smallest 2

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

(i) and (ii) only

CHAPTER 9

1. Which of the following features of financial asset return time-series could be captured using a standard GARCH(1,1)
model?

(i) Fat tails in the return distribution

(ii) Leverage effects

(iii) Volatility clustering

(iv) Volatility affecting returns

(i) and (iii) only

2. If the standard tools for time-series analysis, such as estimation of the acf, pacf and spectral analysis, find no evidence
of structure in the data, this implies that the data are which of the following?

Uncorrelated

3. Consider the following ARCH(3) model for a time-series.

Which of the following parameter values would render the model nonsensical?

(ii) and (iv) only

4. Which of the following statements are true concerning a comparison between ARCH(q) and GARCH(1,1) models?

(i) The ARCH(q) model is likely to be the more parsimonious

(ii) The ARCH(q) model is the more likely to violate non-negativity constraints

(iii) The ARCH(q) model can allow for an infinite number of previous lags of squared returns to affect the current
conditional variance

(iv) The GARCH(1,1) model will usually be sufficient to capture all of the dependence in the conditional variance

(ii) and (iv) only

5. Which of the following statements are true concerning maximum likelihood (ML) estimation in the context of
GARCH models?

(i) Maximum likelihood estimation selects the parameter values that maximise the probability that we would have
actually observed the values of the series y that we actually did.

(ii) GARCH models can only be estimated by ML and not by OLS

(iii) For estimation of a standard linear model (with no GARCH), the OLS and ML estimates for the slope and intercept
parameters will be identical but the estimator for the variance of the disturbances is slightly different

(iv) Most computer packages use numerical procedures to estimate GARCH models rather than a set of analytical
formulae

(i), (ii), (iii), and (iv)

6. Which of the following statements are true concerning the standardised residuals (residuals divided by their respective
conditional standard deviations) from an estimated GARCH model

(i) They are assumed to be normally distributed

(ii) Their squares will be related to their lagged squared values if the GARCH model is appropriate

(iii) In practice, they are likely to have fat tails

(iv) If the GARCH model is adequate, the standardised residuals and the raw residuals will be identical

(i) and (iii) only

7. Which of the following criticisms of standard (“plain vanilla”) GARCH models can be overcome by EGARCH
models?

(i) Estimated coefficient values from GARCH models may be negative

(ii) GARCH models cannot account for leverage effects

(iii) The responsiveness of future volatility to positive and negative shocks is symmetric under a GARCH formulation

(iv) GARCH models cannot allow for a feedback from the volatility to the returns

(i), (ii), and (iii) only

8. If there were a leverage effect in practice, what would be the shape of the news impact curve for as model that
accounted for that leverage?

It would rise more quickly for negative disturbances than for positive ones of the same magnitude

9. Consider the estimation of a GARCH-M model. If the data employed were a time-series of daily corporate bond
percentage returns, which of the following would you expect the value of the GARCH-in-mean parameter estimate to
be?

Between 0 and 1
10. Suppose that we have estimated a GARCH model for daily equity returns, and we are interested in producing a 10-
day forecast of the volatility (measured by the standard deviation of returns) for use in a value at risk model. How could
such a forecast most validly be calculated?

Produce 1, 2, 3, …, 10 step ahead conditional variance forecasts and add them up and take the square root

11. Suppose that we are interested in testing the null hypothesis that a GARCH(2,2) model can be restricted to a process
with a constant conditional variance using the likelihood ratio test approach. Which of the following statements are true?

If the relevant values of the log-likelihood functions are –112.3 and –118.4, the value of the test statistic is 12.2

12. What is the most appropriate value of a forecast (to 2 decimal places) of the conditional variance for time t+2 if the
conditional variance and residual at time t are 0.02 and –0.465 respectively and the model is as follows?

0.04

13. Suppose that you were asked to provide a guess at a 20-step ahead forecast for the model in question 12. What would
the most appropriate guess be (to 2 decimal places)?

0.03

14. Which one of the following equations is the form that is usually used for the conditional covariance equation in a
“diagonal VECH” model (using the standard notation)?

I
15. What is the most important disadvantage of the diagonal VECH approach to building multivariate GARCH models
that is overcome by the BEKK formulation?
The diagonal VECH model does not ensure a positive-definite variance-covariance matrix
16. If a variable or set of variables was described as chaotic, what would this mean?
There is a perfectly deterministic non-linear relationship describing the series or set of series

17. Which of the following are true of artificial neural network models?

(i) Provided that there are a sufficient number of hidden layers, they can approximate functions to any desired degree of
precision
(ii) Linear regression models are special cases of neural networks

(iii) Neural networks are based strongly on financial theory

(iv) They do not require any explanatory variables.

(i) and (ii) only are true

18. In strict terms, is a GARCH process a special case of stochastic volatility and why or why not?
No, because the conditional variance equation is deterministic\

CHAPTER 10:
If a threshold autoregressive (TAR) model is termed a “SETAR”, what must be true about it?
The state-determining variable must be the variable being modelled

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?

It is the average return on Friday

CHAPTER 11,12,13
1. Which of the following is a disadvantage of the fixed effects approach to estimating a panel model?
The number of parameters to estimate may be large, resulting in a loss of degrees of freedom
2. The “within transform” involves
Subtracting the mean of each entity away from each observation on that entity

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
(i) and (ii) only

4. Consider the following equation and determine the class of model that it best represents:

An entity fixed effects model

5. The fixed effects panel model is also sometimes known as
The least squares dummy variables approach
6. Which of the following is a disadvantage of the random effects approach to estimating a panel model?
The approach may not be valid if the composite error term is correlated with one or more of the explanatory variables
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?
If the Hausman test is not satisfied, the random effects model is more appropriate
8. Which of the following statements is false concerning the linear probability model?
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:

Fall by 0.05
10. Which of the following is correct concerning logit and probit models?
They use a different method of transforming the model so that the probabilities lie between zero and one
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 multinomial logit
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?
Censored

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

(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

(i) and (iii) only

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

(i) and (iii) only

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?
Separate unit root tests on each individual time series
17. Panel unit root tests with common alternative hypotheses assume:
Each series must follow the same stochastic process under the alternative hypothesis