Testbank KTLTC Trac Nghiem Kinh Te Luong Tai Chinh

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Testbank- Ktltc - Trắc nghiệm kinh tế lượng tài chính
kinh tế lượng tài chính (Trường Đại học Kinh tế Thành phố Hồ Chí Minh)
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Chapter 1
Correct answers denoted by an asterisk.
1. The linear relationship between two variables (y and x) can be represented by the
equation . Which of the following statements is true?
(I) Parameter a is termed the intercept
(II) Parameter a is termed the slope
(III) Parameter b is termed the gradient
(IV) Parameter b is termed the constant.
(a) I and IV only
(b)* I and III only
(c) II and III only
(d) II and IV only.
2. 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 0.50 and the intercept is 30, what
would be the expected stock price if the dividend paid was 3?
(a) 33
(b) 30.50
(c)* 31.5
(d) 30.
3. Which of the following values are closes to the roots of the following quadratic
equation: ?
(a) 0 and 4
(b) 1 and 4
(c) 0.5 and 3
(d)* 0.3 and 3.7.
4. Consider the following graphs.

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(A) (B)
Which of the following statements is true?

(a) A is depicts a non-linear relationship between y and x
(b) B is depicts a linear relationship between y and x
(c)* A and B depict linear and non-linear relationships between y and x, respectively
(d) A and B depict non-linear and linear relationships between y and x, respectively.
5. Which of the following statements is true about graph (A) above?

(a)* The intercept of the graph is positive and its slope is negative
(b) The intercept of the graph is negative and its slope is positive
(c) Both the intercept and slope of the graph are positive
(d) It is impossible to say anything about the intercept and slope without seeing the
mathematical equation.
6. The simplest possible way of writing 3x5 × 7x3 is:

a. 21 x5 × x3
b. 21 x15
c. * 21x8
d. 21x53.
7. What are the roots of the equation y = 2x2 + 2x – 4?

a. * –2 and 1
b. –1 and 2
c. –2 and 2
d. –2 (repeated).
8. What are the roots of the equation y = x2 + 2x – 6 closest to?

(a) –4 and 2
(b) * –3.65 and 1.65
(c) –7.3 and 3.3
(d) Both complex.
9. ‘x to the power 3’ could be written:

a. 3x
b. 3x3
c. * x3
d. 3x × 3x × 3x.
10. Another way of writing elog(x) is:

a. * 1

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b. log(x)
c. ex
d. x.
11. Log(1) is:

a. 1
b. * 0
c. 2.71828…
d. Undefined.
12. Writing out all the terms in the expression would lead to:
a. * x11 + x12 + x21 + x22
b. x11 × x12 × x21 × x22
c. x1 + x2
d. x11 + x22.
13. is equal to:

a. * 5y
b. y
c. y5
d. 5y5.
14. What is the (first order) derivative of the function ?

(a)
(b)
(c)*
(d) .
15. What is the second order derivative of the function ?

(a)
(b)*
(c)
(d) .
16. The derivative of log(5x) is:

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a. 5/x
b. * 1/x
c. 5log(x)
d. 5/log(x).
17. The derivative of e4x-2 is:

a. 4/(4x-2)
b. (4x-2)e4
c. (4x-2)e4x-2
d. * 4e4x-2.
18. If A is of dimension 1 × 4 and B is of dimension 4 × 1, what is the most accurate term

to describe the result of the matrix multiplication AB?
a. * A scalar
b. A column vector
c. A row vector
d. A matrix.
19. If matrices and , what is AB?
(a)*
(b)
(c)
(d) .
20. The rank of matrices A and B from Question 19 are:

(a) 1 and 2, respectively
(b)* 2 and 1, respectively
(c) 1 and 3, respectively

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(d) 3 and 1, respectively.
21. For two conformable matrices A and B, expanding the parentheses of (AB)-1 gives:
a. A-1B-1
b. * B-1A-1
c. BA
d. AB.
22. What is the inverse of matrix ?
(a)
(b)*
(c)
(d) .
23. The rank of a square matrix is also:

a. The product of the eigenvalues
b. The sum of the eigenvalues
c. * The number of non-zero eigenvalues
d. The number of correlated rows or columns.
24. The trace of matrix C is

(a)* 9
(b) 8
(c) 7
(d) 6.
25. The point where the capital market line is tangential to the efficient frontier is
(a) The point where the portfolio returns are minimised
(b) The point where the portfolio returns are maximised
(c) The point where the portfolio’s Sharpe ratio is minimised
(d)* The point where the portfolio’s Sharpe ratio is maximised.
26. The central limit theorem states that

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(a)* The sampling distribution of the mean of any random sample of observations will
tend towards the normal distribution with mean equal to the population mean as the
sample size tends to infinity
(b) The sampling distribution of the mean of any random sample of observations will
tend towards the normal distribution with mean equal to the population mean as the
sample size tends to zero
(c) The cumulative distribution function of the mean of any random sample of
observations will tend towards the normal distribution with mean equal to the population
mean as the sample size tends to infinity
(d) The probability distribution function of the mean of any random sample of
observations will tend towards the normal distribution with mean equal to the population
mean as the sample size tends to infinity.
27. Consider the following data series: 11, 10, 6, 8, 4, 3, 7. What is its semi-interquartile
range of this series?
(a) 6
(b) 5
(c) 4
(d)* 3.
28. 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

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(c)* Only (I) is true

(d) Both (I) and (IV) are true.
29. Suppose that we have a function given by y = a1 + a2x. a1 and a2 are, respectively,
(a) The domain and range of the function
(b) The order and power of the function
(c) * The intercept and slope of the function
(d) The slope and intercept of the function.
30. What are the roots of the equation y = 3 + 4x + 2x2?

(a) 2 and –4
(b) 0.5 and –2
(c) 2 and 2
(d) * This function has no real roots.
31. (x3)2 simplifies to

(a) x5
(b) * x6
(c) x
(d) The expression cannot be simplified.
32. Which of the following three equations is/are correct regarding the summation
operator?
i=1Kxi+i=1Kzi=i=1Kxi+zi (i)
i=1Kxizi=i=1Kxii=1Kzi (ii)
i=1Kcxi=ci=1Kxi (iii)
a. (iii) only
b. * (i) and (iii) only
c. (i) and (ii) only
d. (i), (ii) and (iii).
33. What is k=13k3?

(a) * 216
(b) 35
(c) 6
(d) 7776.
34. The second order derivative of a quadratic function will be:

(a) A cubic function
(b) A quadratic function
(c) A linear function

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(d) * A constant.
35. Using the chain rule or otherwise, what is the (first) derivative of the following
function? y = (2x2 + 4x – 6)3
(a) 3(2x2 + 4x – 6)2
(b) (4x + 4)2
(c) * 3(2x2 + 4x – 6)2(4x + 4)
(d) 3(2x2 + 4x – 6)3(4x + 4)2.
Chapter 2
1. Financial econometrics can best be described as

(a)* The application of statistical techniques to problems in finance
(b) The application of mathematical models to problems in economics
(c) The application of financial techniques to problems in economics
(d) None of the above.
2. Which of the following is a serious problem encountered by applied econometricians

in economics?
(a) Small samples problems
(b) Measurement error
(c) Data revisions
(d)* All of the above.
3. Which of these is a characteristic of financial data?

(a) They are observed at much lower frequencies than macroeconomic data
(b) The number of observations is usually very small
(c)* They are considered to be very noisy
(d) It is easy to separate underlying trends from random and uninteresting features.
4. Data that have been collected over a period of time on one or more variables is referred
to as
(a) Cross-sectional data
(b) Time-cross-sectional data
(c)* Time-series data
(d) Panel data.
5. Data that have been collected on one or more variables at a single point in time is
referred to as
(a)* Cross-sectional data

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(c) Time series data
(d) Panel data.
6. Data that have both time series and cross-sections is referred to as

(a) Cross-sectional data
(c) Time-series data
(d)* Panel data.
7. An individual invested £106.40 in the stock market and the value of his investment two
years later is £138.22. What are the simple and continuously compounded returns on his
investment?
(a) 26% and 30%, respectively
(b) –29% and -34%, respectively
(c)* 30% and 26%, respectively
(d) 30% and 30%, respectively.
8. An individual has £10000 capital to invest in the stock market. He invests 30% of his
capital in stock A, 25% in stock B and 45% in Stock C. What is the return on his/her
portfolio assuming that the simple returns on stocks A, B and C are 5%, 10% and 12%,
respectively?
(a)* 9.0%
(b) 9.7%
(c) 9.3%
(d) 9%.
The average nominal annual rent in the US denominated in dollars and the CPI (2008
levels) are given in the table below:
Year Average annual rent (US Dollars) CPI (2008 levels)
200 9908 100
8
200 9998 99.7
9
201 10012 101.3
0
2011 10180 104.5
201 10396 106.7
2
9. What is the 2008 average annual rent in 2012 terms?

(a) 9743
(b)* 10572
(c) 9286

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(d) 11093.
10. What is the 2012 average annual rent in 2008 terms?

(a)* 9743
(b) 10572
(c) 9286
(d) 11093.
11. The numerical score assigned to the credit rating of a bond is best described as what
type of number?
(a) Continuous
(b) Cardinal
(c)* Ordinal
(d) Nominal.
12. Suppose that we wanted to sum the 2007 returns on ten shares to calculate the return
on a portfolio over that year. What method of calculating the individual stock returns
would enable us to do this?
(a)* Simple
(b) Continuously compounded
(c) Neither approach would allow us to do this validly
(d) Either approach could be used and they would both give the same portfolio return.
13. If we wish to compare the spread of two series with considerably different mean
values, which of the following measures would be the most appropriate?
(a) The semi-interquartile range
(b) The standard deviation
(c) The range
(d) * The coefficient of variation.
14. For a series with a negative skew in its distribution (a long left tail), which of the
following best describes the relationship between its measures of central tendency?
(a) mean > median > mode
(b) * mode > median > mean
(c) mode > mean > median
(d) median > mode > mean.
15. Which of the following statements is TRUE concerning the correlation between two
series?
(a) * It is unit-free
(b) It scales with the product of the units of the two series
(c) It scales with the ratio of the units of the two series
(d) It will take the value –1 if there is no association between the two series.

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16. What is the sum of the following infinite set of terms? 5, 2.5, 1.25, 0.625, …
(a) Infinity
(b) 5
(c) 20
(d) * 10.
17. What is the sum of the first 12 terms in the following sequence? 12, 24, 48, …
(a) * 49,140
(b) 24,576
(c) 768
(d) 98,292.
18. If I have £10,000 now and I want it to grow by 50% within eight years, what interest
rate, compounded annually, is required (to one decimal place)?
(a) * 5.2%
(b) 6.2%
(c) 4.6%
(d) 7.4%.
19. If a savings account pays a nominal interest rate of 10% per year, compounded
monthly, what is the effective interest rate to one decimal place?
(a) 11.2%
(b) 9.5%
(c) 10.0%
(d) * 10.5%.
20. If you place £10,000 in a savings account, how long would it take to reach £20,000
assuming an annual interest rate of 3%, continuously compounded, rounded to the nearest
year?
(a) 26
(b) 34
(c) *23
(d) 20.
21. What would be a fair price to pay today, to the nearest dollar, for a zero coupon bond
having exactly six years to maturity and to be redeemed at $1000 if the annual discount
rate is 6%?
(a) $1000
(b) * $747
(c) $864
(d) $553.

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22. Which of the following statements is FALSE concerning the internal rate of return?
(a) For projects where the cashflow payments change sign, there can be more than one
internal rate of return
(b) The internal rate of return is the discount rate that sets the net present value of all of
the cashflows to be received equal to the asset’s purchase price
(c) * In order to calculate an internal rate of return, all of the incoming cashflows must be
identical
(d) We cannot calculate a different internal rate of return for each cashflow.
Chapter 3
1. Regression is concerned with describing and evaluating the relationship between

(a) A dependent variable and regressands
(b) An independent variable and regressors
(c)* A dependent variable and regressors
(d) An effect variable and explained variables.
2. What does a positive linear relationship between x and y in a simple regression imply?
(a) Increases in the independent variable are usually accompanied by increases in the
regressor
(b) The relationship between x and y cannot be explained by a straight line
(c) Decreases in the independent variable is usually accompanied by increases in the
regressors
(d)* Increases in the regressor are usually accompanied by increases in the dependent
variable.
3. Which of these is NOT a reason for adding a disturbance term to a regression model
?
(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.
4. Which of these is not a standard method for estimating econometric models?

(a) Ordinary least squares
(b) The method of moments
(c)* Method of generalised squared moments
(d) Maximum likelihood.

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5. The method of estimating econometric models which involves fitting a line to the data
by minimising the sum of squared residuals is the
(a)* Method of ordinary least squares
(b) Method of moments
(c) Method of generalised squared moments
(d) Method of maximum likelihood.
6. Suppose you have 5-year annual data on the excess returns on a fund manager’s
portfolio (‘fund ABC’) and the excess returns on a market index (where is the return
on fund ABC, is the risk-free rate and is the return on the market index):
Year t Excess return on fund ABC Excess return on market index
1 14.0 16.0
2 32.0 21.7
3 11.6 6.0
4 21.2 16.2
5 17.4 11.0
What is the estimated alpha ( ) for Fund ABC?

(a) 2.3
(b)* 3.3
(c) 4.3
(d) 5.3.
7. Given the data in Question 6, what is the estimated beta ( ) of Fund ABC?
(a) 3.1
(b) 2.1
(c)* 1.1
8. Suppose that the unbiased estimator of the standard deviation of the disturbance (s) is
5.1. What is the nearest value to the standard errors of the estimated CAPM alpha ( ) of
Fund ABC from Question 6?
(a) 3.5
(b) 4.5

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(c) 5.5
(d)* 6.5.
9. The estimated alpha ( ) and beta ( ) of a rival fund, Fund DEF, are 2.3 and 3.1,
respectively. If the expected market risk premium is 12%, what would we expect the
excess return of Fund DEF to be?
(a)* 39.5%
(b) 30.7%
(c) 5.4%
(d) 64.8%.
10. What is the most appropriate interpretation of the assumption

concerning the regression disturbance terms?
(a) The errors are nonlinearly independent of one another
(b) The errors are linearly dependent of one another
(c) The covariance of the errors is constant and finite over all its values
(d)* The errors are linearly independent of one another.
11. The estimators and determined by OLS will be the Best Linear Unbiased
Estimators (BLUE) if which of the following assumptions hold?
(I) The errors have zero mean
(II) The variance of the errors is constant and finite over all values of the independent
variable(s)
(III) The errors are linearly independent of one another
(IV)There is no relationship between the error and corresponding independent variables
(a) I and II only
(b) I, II and III only
(c) II, III and IV only
(d)* I, II, III, and IV.
12. Standard errors

(a) Give us an idea of the deviation of the errors from their mean
(b) Measure the reliability of the independent variables
(c)* Give us an idea of the precision of estimates of and
(d) Measure the reliability of the dependent variables.
Suppose you have calculated the following regression results:

. The standard errors of and are 1.22 and 0.58, respectively.

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13. Using 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)* 1.10
(b) 0.91
(c) –0.62
(d) Cannot say without more information.
14. Assuming there are 1000 observations in your sample, what are the test statistic and
critical value of a two-sided hypothesis test of whether the true value of statistically
different from zero be given a 5% significance level?
(a)* 1.10 and 1.96, respectively
(b) 0.91 and 1.65, respectively
(c) –0.62 and 1.96, respectively
(d) Cannot say without more information.
15. Consider a bivariate regression model with coefficient standard errors calculated
using the usual formulae. Which of the following statements is/are correct regarding the
standard error estimator for the slope coefficient?
i. It varies positively with the square root of the residual variance (s)
ii. It varies positively with the spread of X about its mean value
iii. It varies positively with the spread of X about zero
iv. It varies positively with the sample size T
a. * (i) only
b. (i) and (iv) only
c. (i), (ii) and (iv) only
d. (i), (ii), (iii) and (iv).
16. 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 α should be positive and statistically significant
b. The estimate for α should be positive and statistically significantly greater than the
risk-free rate of return
c. The estimate for β should be positive and statistically significant
d. The estimate for α should be negative and statistically significant.
17. What result is proved by the Gauss–Markov theorem?

(a) That OLS gives unbiased coefficient estimates
(b) That OLS gives minimum variance coefficient estimates

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(c) * That OLS gives minimum variance coefficient estimates only among the class of
linear unbiased estimators
(d) That OLS ensures that the errors are distributed normally.
18. The type I error associated with testing a hypothesis is equal to

(a) One minus the type II error
(b) The confidence level
(c) * The size of the test
(d) The size of the sample.
19. Which of the following is a correct interpretation of a ‘95% confidence interval’ for a
regression parameter?
(a) * We are 95% sure that the interval contains the true value of the parameter
(b) We are 95% sure that our estimate of the coefficient is correct
(c) We are 95% sure that the interval contains our estimate of the coefficient
(d) In repeated samples, we would derive the same estimate for the coefficient 95% of the
time.
20. Which of the following statements is correct concerning the conditions required for
OLS to be a usable estimation technique?
a. * The model must be linear in the parameters
b. The model must be linear in the variables
c. The model must be linear in the variables and the parameters
d. The model must be linear in the residuals.
21. Which of the following is NOT a good reason for including a disturbance term in a
regression equation?
(a) It captures omitted determinants of the dependent variable
(b) * To allow for the non-zero mean of the dependent variable
(c) To allow for errors in the measurement of the dependent variable
(d) To allow for random influences on the dependent variable.
22. Which of the following is NOT correct with regard to the p-value attached to a test
statistic?
(a) * p-values can only be used for two-sided tests
(b) It is the marginal significance level where we would be indifferent between rejecting
and not rejecting the null hypothesis
(c) It is the exact significance level for the test
(d) Given the p-value, we can make inferences without referring to statistical tables.

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23. Which one of the following is NOT an assumption of the classical linear regression
model?
a. The explanatory variables are uncorrelated with the error terms.
b. The disturbance terms have zero mean
c. * The dependent variable is not correlated with the disturbance terms
d. The disturbance terms are independent of one another.
24. Which of the following is the most accurate definition of the term ‘the OLS
estimator’?
(a) It comprises the numerical values obtained from OLS estimation
(b) * It is a formula that, when applied to the data, will yield the parameter estimates
(c) It is equivalent to the term ‘the OLS estimate’
(d) It is a collection of all of the data used to estimate a linear regression model.
25. Two researchers have identical models, data, coefficients and standard error
estimates. They test the same hypothesis using a two-sided alternative, but researcher 1
uses a 5% size of test while researcher 2 uses a 10% test. Which one of the following
statements is correct?
a. Researcher 2 will use a larger critical value from the t-tables
b. * Researcher 2 will have a higher probability of type I error
c. Researcher 1 will be more likely to reject the null hypothesis
d. Both researchers will always reach the same conclusion.
26. Consider an increase in the size of the test used to examine a hypothesis from 5% to
10%. Which one of the following would be an implication?
a. * The probability of a Type I error is increased
b. The probability of a Type II error is increased
c. The rejection criterion has become more strict
d. The null hypothesis will be rejected less often.
27. What is the relationship, if any, between the normal and t-distributions?
a. A t-distribution with zero degrees of freedom is a normal
b. A t-distribution with one degree of freedom is a normal
c. * A t-distribution with infinite degrees of freedom is a normal
d. There is no relationship between the two distributions.
Chapter 4

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1. Consider a standard normally distributed variable, a t-distributed variable with d

degrees of freedom, and an F-distributed variable with (1, d) degrees of freedom.
Which of the following statements is FALSE?
a. The standard normal is a special case of the t-distribution, the square of which is a
special case of the F-distribution
b. * Since the three distributions are related, the 5% critical values from each will be the
same
c. Asymptotically, a given test conducted using any of the three distributions will lead to
the same conclusion
d. The normal and t- distributions are symmetric about zero while the F-distribution
takes only positive values.
2. If our regression equation is y = Xβ + u, where we have T observations and k

regressors, what will be the dimension of using the standard matrix notation
(a) T × k
(b) T × 1
(c) * k × 1
(d) k × k.
Question 3 refers to the following regression estimated on 64 observations:

yt = β1 + β2X2t + β3X3t + β4X4t + ut
3. Which of the following null hypotheses could we test using an F-test?

(i) β2 = 0
(ii) β2 = 1 and β3 + β4 = 1
(iii) β3β4 = 1
(iv) β2 -β3 -β4 = 1.
(a) (i) and (ii) only

(b) (ii) and (iv) only
(c) (i), (ii), (iii), and (iv)
(d)* (i), (ii), and (iv) only.
For Question 4, you are given the following data
The regression equation is

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yt = β1 + β2X2t + β3X3t + ut
4. Which of the following is the correct value for ?

(a) * 2.89
(b) 1.30
(c) 0.84
(d) We cannot determine the value of from the information given in the question.
5. Consider the following regression estimated using 84 observations:

yt = β1 + β2X2t + β3X3t + β4X4t + ut
Suppose that a researcher wishes to test the null hypothesis: β2 = 1 and β3 + β4 = 1. The
TABULATED value of the F-distribution that we would compare the result of testing this
hypothesis with at the 10% level would be approximately
(a) 19.48
(b) 2.76
(c) * 2.37
(d) 3.11.
6. What is the relationship, if any, between t-distributed and F-distributed random

variables?
a. A t-variate with z degrees of freedom is also an F(1, z)
b. * The square of a t-variate with z degrees of freedom is also an F(1, z)
c. A t-variate with z degrees of freedom is also an F(z, 1)
d. There is no relationship between the two distributions.
7. Which one of the following statements must hold for EVERY CASE concerning the
residual sums of squares for the restricted and unrestricted regressions?
a. URSS > RRSS
b. URSS ≥ RRSS
c. RRSS > URSS
d. * RRSS ≥ URSS.
8. Which one of the following is the most appropriate as a definition of R2 in the context
that the term is usually used?
a. It is the proportion of the total variability of y that is explained by the model
b. * It is the proportion of the total variability of y about its mean value that is
explained by the model
c. It is the correlation between the fitted values and the residuals
d. It is the correlation between the fitted values and the mean.

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9. Suppose that the value of R2 for an estimated regression model is exactly one. Which
of the following are true?
i. All of the data points must lie exactly on the line
ii. All of the residuals must be zero
iii. All of the variability of y about its mean has been explained by the model
i. The fitted line will be horizontal with respect to all of the explanatory variables.
a. (ii) and (iv) only

b. (i) and (iii) only
c. * (i), (ii), and (iii) only
(d) (i), (ii), (iii), and (iv).
10. Consider the following two regressions
Which of the following statements are true?

i. The RSS will be the same for the two models
ii. The R2 will be the same for the two models
iii. The adjusted R2 will be different for the two models
iv. The regression F-test will be the same for the two models.

b. * (i) and (iii) only
c. (i), (ii), and (iii) only
d. (i), (ii), (iii), and (iv).
11. Which of the following are often considered disadvantages of the use of adjusted R2
as a variable addition/variable deletion rule?
i. Adjusted R2 always rises as more variables are added
ii. Adjusted R2 often leads to large models with many marginally significant or
marginally insignificant variables
iii. Adjusted R2 cannot be compared for models with different explanatory variables
iv. Adjusted R2 cannot be compared for models with different explained variables.
a. * (ii) and (iv) only


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12. Which of these is a mathematical expression of the residual sum of squares?

(I)
(II)
(III)
(a) * I only
(b) I and II only
(c) I and III only
(d) I, II and III.
13. If you are interested in conducting a multiple hypotheses test to determine whether
and are both unity for a regression , what would the
restricted regression be?
(a)
(b)
(c)*
(d) .
14. What would the restricted regression be if you are interested in testing the null
hypothesis and against the alternative hypothesis or
for a regression ,?
(a)*
(b)
(c)
(d) .

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15. Assuming that the restricted sum of squares of the restricted regression in Question 14
is 436.1 and the unrestricted sum of squares is 397.2, what would the conclusion of the
hypothesis test be? (The significance level is 5%.)
(a)* Reject the null hypothesis
(b) Do not reject the null hypothesis
(c) Reject the alternative hypothesis
(d) Cannot say.
16. Which of these statements is a characteristic of the stepwise regression procedure?

(I) It chooses the jointly most ‘important’ explanatory variable from a set of candidate
variables
(II) It can start with no variables in the regression and then it selects first the variable
with the lowest p-value
(III) It can start with no variables in the regression and then it selects first the variable
with the highest p-value
(a) I only
(b) II only
(c) III only
(d)* Both I and II.
17. Trying many variables in a regression without basing the selection of candidate
variables on a financial or economic theory is popularly referred to as
(a) Data fitting
(b) Data clipping
(c)* Data mining
18. Why is R2 a commonly used and perhaps better measure of how well a regression
model fits the data than the residual sum of squares (RSS)?
(a) The RSS is often too large
(b) The RSS does not depend on the scale of the dependent variable whereas the R2 does
(c)* The RSS depends on the scale of the dependent variable whereas the R2 does not
(d) The RSS depends on the scale of the independent variable whereas the R2 does not.
Use the following to answer Questions 19 and 20.

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Assuming you have two regression models and

.
19. How can the two models be validly compared to determine the model that better
represents the data yt?
(a) By observing their respective R2
(b) By observing their respective Adjusted R2
(c) By estimating an encompassing or hybrid model
20. What is the relevant encompassing model required to compare the two regression
models?
(a)*
(b)
(c)
(d) Encompassing models cannot be used to compare these specifications.
21. Which of these statements is NOT true about quantile regressions?

(a) No distributional assumptions are required to optimally estimate the parameters
(b) It is a non-parametric technique
(c)* It is a parametric technique
(d) The response variable is usually assumed to be independently distributed and
homoscedastic.
Chapter 5
2. A researcher conducts a Breusch–Godfrey test for autocorrelation using 3 lags of

the residuals in the auxiliary regression. The original regression contained 5
regressors including a constant term, and was estimated using 105 observations.
What is the critical value using a 5% significance level for the LM test based on T
R2?
a. 1.99
b. 2.70
c. * 7.81
d. 8.56.

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2. 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.
3. Which of the following conditions must be fulfilled for the Durbin–Watson test to be
valid?
(i) The regression includes a constant term
(ii) The regressors are non-stochastic
(iii) There are no lags of the dependent variable in the regression
(iv) There are no lags of the independent variables in the regression.
(a)* (i), (ii), and (iii) only

(b) (i) and (ii) only
(c) (i), (ii), (iii), and (iv)
(d) (i), (ii), and (iv) only.
4. If the residuals of a regression on a large sample are found to be heteroscedastic which

of the following might be a likely consequence?
(i) The coefficient estimates are biased
(ii) The standard error estimates for the slope coefficients may be too small
(iii) Statistical inferences may be wrong.
(a) (i) only

(b) * (ii) and (iii) only
(c) (i), (ii), and (iii)
(d) (i) and (ii) only.
5. The value of the Durbin–Watson test statistic in a regression with 4 regressors

(including the constant term) estimated on 100 observations is 3.6. What might we
suggest from this?
(a) The residuals are positively autocorrelated
(b) * The residuals are negatively autocorrelated
(c) There is no autocorrelation in the residuals
(d) The test statistic has fallen in the intermediate region.
6. Which of the following is NOT a good reason for including lagged variables in a
regression?
(a) Slow response of the dependent variable to changes in the independent variables
(b) Over-reactions of the dependent variables
(c) The dependent variable is a centred moving average of the past 4 values of the series

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(d) * The residuals of the model appear to be non-normal.
7. What is the long-run solution to the following dynamic econometric model?

Δyt = β1 + β2ΔX2t + β3ΔX3t + ut
(a) y = β1 + β2X2 + β3X3
(b) yt = β1 + β2X2t + β3X3t
(c) y = - (β2/ β1) X2 - (β3 / β1)X3
(d) * There is no long-run solution to this equation.
8. 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.
9. A normal distribution has coefficients of skewness and excess kurtosis which are,
respectively,
(a) * 0 and 0
(b) 0 and 3
(c) 3 and 0
(d) Will vary from one normal distribution to another.
10. Which of the following would probably NOT be a potential ‘cure’ for non-normal
residuals?
(a) * Transforming two explanatory variables into a ratio
(b) Removing large positive residuals
(c) Using a procedure for estimation and inference which did not assume normality
(d) Removing large negative residuals.
11. What would be the consequences for the OLS estimator if autocorrelation is present
in a regression model but ignored?
(a) It will be biased
b. It will be inconsistent
b. * It will be inefficient
b. All of (a), (b), and (c) will be true.
12. If OLS is used in the presence of heteroscedasticity, 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

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iv. Standard errors may inappropriate.
(a) * (ii) and (iv) only

(c) (i), (ii), and (iii) only
(d) (i), (ii), (iii), and (iv).
13. If a residual series is negatively autocorrelated, which one of the following is the
most likely value of the Durbin–Watson statistic?
a. Close to zero
b. Close to two
c. * Close to four
d. Close to one.
14. If the residuals of a model containing lags of the dependent variable are
autocorrelated, which one of the following could this lead to?
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.
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. Which one of the following would be the most appropriate auxiliary regression for a
Ramsey RESET test of functional form?
(a) *
b.
b.
b. .
17. If a regression equation contains an irrelevant variable, the parameter estimates will
be
a. * Consistent and unbiased but inefficient
b. Consistent and asymptotically efficient but biased
c. Inconsistent
d. Consistent, unbiased and efficient.

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18. Put the following steps of the model-building process in the order in which it would
be statistically most appropriate to do them:
(i) Estimate model
(ii) Conduct hypothesis tests on coefficients
(iii) Remove irrelevant variables
(iv) Conduct diagnostic tests on the model residuals.
a. (i) then (ii) then (iii) then (iv)

b. (i) then (iv) then (ii) then (iii)
c. * (i) then (iv) then (iii) then (ii)
d. (i) then (iii) then (ii) then (iv).
19. Test statistics for the LM test and the Wald test are usually constructed to follow a
(a)* χ2 distribution and F-distribution, respectively
(b) χ2 distribution and t-distribution, respectively
(c) F-distribution and χ2 distribution, respectively
(d) t-distribution and χ2 distribution, respectively.
20. Which of these statements is true?

(I) The F-distribution has 2 degrees of freedom parameters
(II) Asymptotically, the LM test and the Wald test are equivalent
(III) The results from the LM and Wald tests may differ somewhat in small samples
(IV) The F-distribution is a special case of the t-distribution.
(a) I only
(b) I and II
(c)* I, II, and III
(d) I, II, III, and IV.
21. The assumption of homoscedasticity can be written mathematically as

(a)*
(b)
(c)
(d) .
22. 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

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variances and , , and . What would your conclusion

be?
(a) Do not reject the null hypothesis of heteroscedasticity
(b) Reject the null hypothesis of homoscedasticity
(c) Reject the null hypothesis of heteroscedasticity
(d)* Do not reject the null hypothesis of homoscedasticity.
23. Which of these is a test for heteroscedasticity?

(a) Breusch–Godfrey test
(b)* White test
(c) Bera–Jarque test
(d) Breusch–Jagan test.
24. Which of these is NOT a viable ‘solution’ for heteroscedasticity?

(a) Using generalised least squares if the form of heteroscedasticity is known
(b) Transforming the variables into logs
(c) Using heteroscedasticity-consistent standard error estimates
(d)* Taking the first differences of the series.
(A) (B)
25. The graphs above are time series plots of residuals from two separate regressions.
Which of these combinations is true?
(a)* A shows negative autocorrelation and B shows positive autocorrelation
(b) A shows positive autocorrelation and B shows negative autocorrelation
(c) A shows heteroscedasticity and B shows homoscedasticity
(d) A shows homoscedasticity and B shows heteroscedasticity.

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26. Assuming a researcher runs the following regression where is residual

from a regression. If the researcher conducts a hypothesis test with null hypothesis of
against an alternative hypothesis of , what type of test is he or she
conducting?
(a) Test for heteroscedasticity
(b)* Test for autocorrelation
(c) Test for non-normality
(d) Test for homoscedasticity.
27. Assuming the researcher now runs the following regression

where is residual from a regression. If the researcher
conducts a test with a null hypothesis of and and ... and against
an alternative hypothesis of or or ... or , what type of test is he or
she conducting?
(a) Test for rth order of heteroscedasticity
(b)* Test for rth order of autocorrelation
(c) Test for rth order of non-normality
(d) Test for rth order of homoscedasticity.
28. Which of these is not a consequence of ignoring autocorrelation if it is present?

(a) The coefficient estimates derived using OLS are inefficient
(b) Standard error estimates are inappropriate
(c)* The coefficient estimates derived using OLS are biased
(d) The coefficient estimates derived using OLS are not the best linear unbiased
estimators.
29. Which of these is a viable solution to the problem of multicollinearity?

(I) Ignore it
(II) Drop one of the collinear variables
(III) Transform the highly correlated variables into a ratio
(IV) Take the logs of the variables
(a) I only
(b) I and II only
(c)* I, II, and III only
30. Which of the following statements are true about parameter stability tests?
(I) Parameter stability tests test the assumption that the estimated parameters of a model
are constant for the entire sample
(II) Chow test and predictive failure tests are two types of parameter stability tests

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(III) Backward and forward predictive failure tests are two types of parameter stability
tests
(IV) Parameter stability tests examine violations of the classical linear regression model
assumptions.
(a) I only
(b) I and II only
31. Simultaneous equations bias is a situation where

(a)* There is a two-way causal relationship between the explanatory and explained
variable
(b) There is a two-way causal relationship between two selected explanatory variables
(c) There is a two-way causal relationship between two selected independent variables
(d) There is a two-way causal relationship between the residuals of two regression
models.
Chapter 6
1. Consider the following model estimated for a time series

yt = 0.3 + 0.5 yt-1 - 0.4 εt-1 + εt
where εt is a zero mean error process.
What is the (unconditional) mean of the series, yt ?
(a) * 0.6 (tương tự pt AR = 0.3/(1-0.5))

(b) 0.3
(c) 0.0
(d) 0.4.
2. Consider the following single exponential smoothing model:

St = α Xt + (1-α) St-1
You are given the following data:
=0.1, Xt=0.5,St-1=0.2
If we believe that the true DGP can be approximated by the exponential smoothing
model, what would be an appropriate 2-step-ahead forecast for X? (i.e., a forecast of Xt+2
made at time t)
(a) 0.2
(b) * 0.23
(c) 0.5

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(d) There is insufficient information given in the question to form more than a one-step-
ahead forecast.
3. Consider the following MA(3) process

yt = 0.1 + 0.4ut-1 + 0.2ut-2 – 0.1ut-3 + ut
What is the optimal forecast for yt, 3 steps into the future (i.e., for time t+2 if all
information until time t–1 is available), if you have the following data?
ut-1 = 0.3; ut-2 = –0.6; ut-3 = –0.3
a. 0.4
b. 0.0
c. * 0.07
d. –0.1.
4. Which of the following sets of characteristics would usually best describe an

autoregressive process of order 3 (i.e., an AR(3))?
(a) * A slowly decaying acf, and a pacf with 3 significant spikes

(b) A slowly decaying pacf and an acf with 3 significant spikes
(c) A slowly decaying acf and pacf
(d) An acf and a pacf with 3 significant spikes.
5. A process, xt, which has a constant mean and variance, and zero autocovariance for all
non-zero lags is best described as
(a) * A white noise process

(b) A covariance stationary process
(c) An autocorrelated process
(d) A moving average process.
6. Which of the following conditions must hold for the autoregressive part of an ARMA
model to be stationary?
(a) * All roots of the characteristic equation must lie outside the unit circle
(b) All roots of the characteristic equation must lie inside the unit circle
(c) All roots must be smaller than unity
(d) At least one of the roots must be bigger than one in absolute value.
7. Which of the following statements are true concerning time-series forecasting?

(i) All time-series forecasting methods are essentially extrapolative
(ii) Forecasting models are prone to perform poorly following a structural break in a
series

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(iii) Forecasting accuracy often declines with prediction horizon

(iv) The mean squared errors of forecasts are usually very highly correlated with the
profitability of employing those forecasts in a trading strategy.
(a) (i), (ii), (iii), and (iv)

(b) * (i), (ii), and (iii) only
(c) (ii), (iii) only
(d) (ii) and (iv) only.
8. If a series, yt, follows a random walk (with no drift), what is the optimal 1-step-ahead
forecast for y?
a. * The current value of y
b. Zero
c. The historical unweighted average of y
d. An exponentially weighted average of previous values of y.
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 autocorrelation function 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. Which of the following statements are TRUE?

i. An MA(q) can be expressed as an AR(infinity) if it is invertible
ii. An AR(p) can be written as an MA(infinity) if it is stationary
iii. The (unconditional) mean of an ARMA process will depend only on the intercept
and on the AR coefficients and not on the MA coefficients
iv. A random walk series will have zero pacf except at lag 1.

d. * (i), (ii), (iii), and (iv).
11. Consider the following picture and suggest the model from the following list that best
characterises the process:

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a. An AR(1)
b. An AR(2)
c. * An ARMA(1,1)
d. An MA(3).
The acf is clearly declining very slowly in this case, which is consistent with their being an
autoregressive part to the appropriate model. The pacf is clearly significant for lags 1 and
2, but the question is: does it them become insignificant for lags 2 and 4, indicating an
AR(2) process, or does it remain significant, which would be more consistent with a
mixed ARMA process? Well, given the huge size of the sample that gave rise to this acf
and pacf, even a pacf value of 0.001 would still be statistically significant. Thus an
ARMA process is the most likely candidate, although note that it would not be possible to
tell from the acf and pacf which model from the ARMA family was more appropriate.
The DGP for the data that generated this plot was y_t = 0.9 y_(t–1) – 0.3 u_(t–1) + u_t.
12. Which of the following models can be estimated using ordinary least squares?
i. An AR(1)
(ii) An ARMA(2,0)
(iii) An MA(1)
(iv) An ARMA(1,1).
a. (i) only
b. * (i) and (ii) only

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13. If a series, y, is described as ‘mean-reverting’, which model from the following list is
likely to produce the best long-term forecasts for that series y?
a. A random walk
b. * The long term mean of the series
c. A model from the ARMA family
d. A random walk with drift.
14. Consider the following AR(2) model. What is the optimal 2-step-ahead forecast for y
if all information available is up to and including time t, if the values of y at time t, t-1
and t-2 are –0.3, 0.4 and –0.1, respectively, and the value of u at time t-1 is 0.3?
yt = –0.1 + 0.75yt-1 – 0.125yt-2 + ut
a. –0.1
b. 0.27
c. * –0.34
d. 0.30.
15. What is the optimal three-step-ahead forecast from the AR(2) model given in
Question 14?
a. –0.1
b. 0.27
c. –0.34
d. * –0.31.
16. Suppose you had to guess at the most likely value of a one hundred-step-ahead
forecast for the AR(2) model given in Question 14 – what would your forecast be?
a. -0.1
b. 0.7
c. * –0.27
d. 0.75.
17. Which of these is NOT a consequence of working with non-stationarity variables?

(a) Shocks will be persistent
(b) Unjustifiably high R2
(c) The standard assumptions for asymptotic analysis will be invalid
(d)* It leads to data mining.

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18. Three characteristics of a weakly stationary process are

(I)
(II)
(III) .
What do the mathematical expressions I, II, and III imply?

(a) Constant variance, constant mean, and constant autocovariance, respectively
(b) Constant autocovariance structure, constant mean, and constant variance, respectively
(c) Constant mean, constant autocorrelation, and constant autocovariance, respectively
(d)* Constant mean, constant variance, and constant autocovariance structure,
respectively.
Use the following to answer Questions 19 and 20. Suppose that you have estimated the
first five autocorrelation coefficients using a series of length 81 observations and found
them to be
19. Which autocorrelation coefficients are significantly different from zero at the 5%
level?
(a) The first and fifth autocorrelation coefficient
(b) The first, second, third, and fifth autocorrelation coefficient
(c)* The first, third, and fifth autocorrelation coefficient (+/-1.96/căn T)
(d) The second and fourth autocorrelation coefficient.
20. What is the appropriate Box–Pierce test statistic?

(a) 4.78
(b)* 47.83
(c) 59.05
(d) 5.91.
21. Consider the following MA(2) process where the errors follow a
standard normal distribution. What is the variance of ?
(a)
(b)
(c)

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22. A model where the current value of a variable depends upon only the values that the
variable took in previous periods plus an error term is called
(a)* An autoregressive model
(b) An autoregressive moving average model
(c) An autoregressive integrated moving average model
(d) A periodic lag model.
23. Is the following process stationary?

(a) Yes
(b)* No
(c) Partly stationary
(d) Cannot say.
24. What type of a process is

?
(a) An autoregressive model
(b)* An autoregressive moving average model
(c) An autoregressive integrated moving average model
(d) A periodic lag model.
25. Which of these is an appropriate way to determine the order of an ARMA model
required to capture the dynamic features of a given data?
(a) Graphically plotting the time series of the data
(b) Determining the number of parameters that maximises the information criteria
(c)* Determining the number of parameters that minimises the information criteria
26. A recursive forecasting framework is one where

(a)* The initial estimation date is fixed but additional observations are added one at a
time to the estimation period
(b) The length of the in-sample period used to estimate the model is fixed so that the start
date and end date successively increase by one observation
(c) The initial estimation date changes as additional observations are added one at a time
to the estimation period
(d) The length of the out-of-sample period used to estimate the model is fixed so that the
start date and end date successively increase by one observation.
27. A rolling window forecasting framework is one where

(a) The initial estimation date is fixed but additional observations are added one at a time

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(b)* The length of the in-sample period used to estimate the model is fixed so that the
start date and end date successively increase by one observation
(c) The initial estimation date changes as additional observations are added one at a time
(d) The length of the out-of-sample period used to estimate the model is fixed so that the
start date and end date successively increase by one observation.
Use the following to answer Questions 28 to 30.

A researcher is interested in forecasting the house price index in Country Z. The observed
price index values from 1996 to 2000 are 101, 103 104, 107 and 111. The researcher uses
two different forecasting models, A and B. The forecasts for the price index using Model
A are 100.5, 102.4, 103.2, 106 and 111 whilst the forecast using Model B are 100.8,
102.2, 104, 104.2 and 112.1.
28. What are the closest to the mean squared errors for model A and B’s forecasts?
(a) 0.58 and 0.98, respectively
(c)* 0.45 and 1.95, respectively
(d) 1.95 and 0.45, respectively.
29. What are the closest to the mean absolute errors from models A and B?
(a)* 0.58 and 0.98, respectively
(c) 0.45 and 1.95, respectively
30. Based on the MAE and MSE forecast evaluation metrics, which of these statements
are true?
(a)* Model A outperforms Model B at forecasting the house price index
(b) Model A underperforms Model B at forecasting the house price index
(c) Model A and Model B perform equally well at forecasting the house price index
(d) We cannot tell which model does best.
Chapter 7
1. Which of the following are characteristics of vector autoregressive (VAR) models?

(i) They are typically a-theoretical and data driven
(ii) They can easily lead to overfitting
(iii) All variables on the right hand side of the equation are pre-determined
(iv) Their interpretation is often difficult from a theoretical perspective.

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

(b) (i), (ii), and (iv) only
(c) (i) and (ii) only
(d) (i) and (iv) only.
For Questions 2 and 3, consider the following set of simultaneous equations:
Assume that the Y’s are endogenous and the X’s exogenous variables, and that the error
terms are uncorrelated.
2. Which of the following statement is true of equation (3)?
(a) According to the order condition, it is not identified

(b) According to the order condition, it is just identified
(c) * According to the order condition, it is over-identified
(d) There is insufficient information given in the question to determine whether the
equation is identified or not.
3. Estimation of equation (2) on its own using OLS would result in
(a) Consistent and unbiased coefficient estimates

(b) Consistent coefficient estimates which might be biased in small samples
(c) Inconsistent but unbiased coefficient estimates
(d) * Coefficient estimates that are neither unbiased nor consistent.
4. Which of the following statements is INCORRECT?
(a) Equations that are part of a recursive system can be validly estimated using OLS
(b) Unnecessary use of two-stage least squares (2SLS) – i.e., on a set of right hand side
variables that are in fact exogenous – will result in consistent but inefficient coefficient
estimates
(c) 2SLS is just a special case of instrumental variables (IV) estimation
(d) * 2SLS and indirect least squares (ILS) are equivalent for over-identified systems.
5. Which of the following could be viewed as a disadvantage of the vector autoregressive

(VAR) approach to modelling?
(a) We do not need to specify which variables are endogenous and which are exogenous
(b) Standard form VARs can be estimated equation-by-equation using OLS

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(c) * VARs often contain a large number of terms

(d) VARs can be expressed using a very compact notation.
6. Consider the following bivariate VAR(2):
Which of the following coefficient significances are required to be able to say that y1
Granger-causes y2 but not the other way around?
a. α13 and α14 significant; α21 and α22 not significant
b. * α21 and α22 significant; α13 and α14 not significant
c. α21 and α23 significant; α11 and α13 not significant
d. α11 and α13 significant; α21 and α23 not significant.
7. Which of the following statements is TRUE concerning VAR impulse response
functions?
(i) Impulse responses help the researcher to investigate the interactions between the
variables in the VAR
(ii) An impulse response analysis is where we examine the effects of applying unit shocks
to all of the variables at the same time
(iii) Impulse responses involve calculating the proportion of the total forecast error
variance of a given variable that is explained by innovations to each variable
(iv) If the ±2 standard error bars around the impulse responses for a given lag span (i.e.,
include) the x-axis, it would be said that the response is statistically significant.
(b) (i), (ii), and (iii) only
(c) (i) only
(d) * (i) and (ii) only.
8. In the context of simultaneous equations modelling, which of the following statements
is TRUE concerning an exogenous variable?
a. The values of exogenous variables are determined within the system
b. * The exogenous variables are assumed to be fixed in repeated samples
c. Reduced form equations will not contain any exogenous variables on the RHS
d. Reduced form equations will contain only exogenous variables on the LHS.
9. Comparing the information criteria approach with the likelihood ratio test approach to
determining the optimal VAR lag length, which one of the following statements is true?
a. The choice of stiffness of penalty term will not affect the model choice
b. The validity of information criteria relies upon normal residuals
c. * Conducting a likelihood ratio test could lead to a sub-optimal model selection
d. An application of the univariate information criteria to each equation will give
identical results to the application of a multivariate version of the criteria to all of
the equations jointly.
10. The second stage in two-stage least squares estimation of a simultaneous system
would be to

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a. Estimate the reduced form equations

b. * Replace the endogenous variables that are on the RHS of the structural equations
with their reduced form fitted values
c. Replace all endogenous variables in the structural equations with their reduced
form fitted values
d. Use the fitted values of the endogenous variables from the reduced forms as
additional variables in the structural equations.
11. Which of these assumptions is violated when an equation is estimated using OLS
when it is in fact part of a simultaneous structural system?
(a)
(b)*
(c)
12. A variable x is defined as ________ if its value is determined outside of the equation
or system of equations. What is the blank?
(a) Endogenous
(b)* Exogenous
(c) Homogeneous
(d) Heterogeneous.
13. Which of these is not an appropriate method of estimating equations that are from a
simultaneous system?
(a) Indirect least squares
(b) Two-stage least squares
(c)* Aggregate least squares
(d) Instrumental variables.
14. Which of these statements is true about vector autoregressive models?
(I) They allow the value of a variable to depend on more than just its own lags
(II) All variables are endogenous
(III) The researcher does not need to specify which variables are endogenous or
exogenous
(IV) All variables are exogenous
(a) I only
(b) I and II only
15. Which of these is an approach used to determine the appropriate lag lengths of VAR
models?
(a) Graphically plotting the time series of the data
(b) Selecting the number of lags that maximises the information criteria
(c)* Selecting the number of lags that minimises the information criteria

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16. Assuming that you have a VAR model with 2 variables (A and B) including many
lags, how can you test whether A cause Granger-causes changes in B?
(a) By observing if the differences in correlation between A and B are statistically
significant
(b)* Impose restrictions that all the coefficients of the lags of A are equal to 0 in the
equation for B of the VAR model and test the joint hypothesis within the F-test
framework
(c) Impose restrictions that all the coefficients of the lags of B are equal to 0 in the
equation for A of the VAR model and test the joint hypothesis within the F-test
framework
17. Impulse responses:
(a)* Trace out the responsiveness of the dependent variables in the VAR to shocks to each
of the variables
(b) Are a different term for variance decompositions
(c) Trace out the responsiveness of the residuals in the VAR to shocks to each of the
variables
(d) Give the proportion of the movements in the dependent variables that are due to their
own shocks versus shocks to other variables.
18. Variance decompositions

(a) Trace out the responsiveness of the dependent variables in the VAR to shocks to each
of the variables
(b) Will always give the same conclusions as impulse responses
(c) Trace out the responsiveness of the residuals in the VAR to shocks to each of the
variables
(d)* Give the proportion of the movements in the dependent variables that are due to their
own shocks versus shocks to other variables.
Chapter 8
1. Which of the following are probably valid criticisms of the Dickey–Fuller

methodology?
(i) The tests have a unit root under the null hypothesis and this may not be rejected due to
insufficient information in the sample
(ii) The tests are poor at detecting a stationary process with a unit root close to the non-
stationary boundary
(iii) The tests are highly complex to calculate in practice
(iv) The tests have low power in small samples.

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(b) * (i), (ii), and (iv) only
(c) (i) and (iii) only
(d) (ii) only.
2. Which of the following are problems associated with the Engle–Granger approach to
modelling using cointegrated data?
(i) The coefficients in the cointegrating relationship are hard to calculate
(ii) This method requires the researcher to assume that one variable is the dependent
variable and the others are independent variables
(iii) The Engle–Granger technique can only detect one cointegrating relationship
(iv) The Engle-Granger technique does not allow the testing of hypotheses involving the
actual cointegrating relationship.

(b) * (ii), (iii), and (iv) only
(c) (ii), (iii) only
(d) (ii) and (iv) only.
3. Consider the following vector error correction (VECM) model:

Δyt = Πyt-5 + Γ1Δyt-1 + Γ2Δyt-2 + Γ3Δyt-3 + Γ4Δyt-4 + ut
where yt is a k × 1 vector of variables, and ut is a k × 1 vector of disturbances.
Which of the following statements is true of the VECM?
(a) Johansen’s test for cointegration centres on the rank of the matrix Γ1
(b) If the variables yt are cointegrated, Π will be of full rank
(c) If the rank of Π is zero, the variables are cointegrated
(d) * Provided that all of the series in y are non-stationary, the rank of Π can be at most
k-1.
4. Consider the following matrix:
What are its characteristic roots?

(a) * 5 and 0
(b) 5 and 5
(c) 3 and 2
(d) 0 and 0.

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5. You have the following data for Johansen’s λmax rank test for cointegration between 4
international equity market indices:
r λmax 5% Critical Value
0 40.03 30.26
1 26.81 23.84
2 13.42 17.72
3 8.66 10.71
How many cointegrating vectors are there?
(a) 0
(b) 1
(c) * 2
(d) 3.
6. Which criticism of Dickey–Fuller (DF)-type tests is addressed by stationarity tests,

such as the KPSS test?
(a) * DF tests have low power to reject the null hypothesis of a unit root, particularly in
small samples.
(b) DF tests are always over-sized.
(c) DF tests do not allow the researcher to test hypotheses about the cointegrating vector
(d) DF tests can only find at most one cointegrating relationship.
7. Consider the following data generating process for a series yt:
Which one of the following most accurately describes the process for yt?
a. A random walk with drift

b. A non-stationary process
c. A deterministic trend process
d. * An explosive process.
8. Which one of the following best describes most series of asset prices?
(a) An independently and identically distributed (iid, i.e., ‘completely random’) process
(b) * A random walk with drift
(c) An explosive process
(d) A deterministic trend process.
9. If there are three variables that are being tested for cointegration, what is the maximum
number of linearly independent cointegrating relationships that there could be?
(a) 0
(b) 1

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(c) *2
(d) 3.
10. If the number of non-zero eigenvalues of the pi matrix under a Johansen test is 2, this
implies that
(a) * There are 2 linearly independent cointegrating vectors
(b) There are at most 2 linearly independent cointegrating vectors
(c) There are 3 variables in the system
(d) There are at least 2 linearly independent cointegrating vectors.
11. If a Johansen ‘max’ test for a null hypothesis of 1 cointegrating vectors is applied to a
system containing 4 variables, which eigenvalues would be used in the test?
(a) The largest 1
(b) * The second largest
(c) The second smallest
(d) The smallest.
12. Consider the testing of hypotheses concerning the cointegrating vector(s) under the
Johansen approach. Which of the following statements is correct?
(a) If the restriction is (are) rejected, the number of cointegrating vectors will rise
(b) If the restriction(s) is (are) rejected, the number of eigenvalues will fall
(c) Whether the restriction is supported by the data or not, the eigenvalues are likely to
change at least slightly upon imposing the restriction(s)
(d) * All linear combinations of the cointegrating vectors are themselves cointegrating
vectors.
13. Which of these is a characteristic of a stationary series?

(a) Constant mean
(b) Constant autocovariances for each given lag
(c) Constant variance
14. Which of the following are consequences of using non-stationary data in regressions?
(I) Shocks will be persistent
(II) It can lead to spurious regressions
(III) t-ratios will not follow a t-distribution
(IV) The F-statistic will not follow an F-distribution.
(a) I only
(b) I and II only
(c) I, II, and III only

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15. What is the impact of shocks to an AR(1) with no drift if ?

(a) Shocks will gradually die away
(b) Shocks will persist in the system and never die away
(c) Shocks will start to increase after the next observation but gradually die away
(d)* Shocks become more and more influential as time goes on.
16. What is the impact of shocks to an AR(1) with no drift if ?

(a) Shocks will gradually die away
(b)* Shocks persist in the system and never die away
(c) Shocks will start to increase after the next observation but gradually die away
(d) Shocks become more and more influential as time goes on.
17. 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.
18. The plotted series in the following graph is an example of a:
(a) Stationary process

(b)* Deterministic trend process
(c) White noise prices
(d) Random walk with drift.
19. A researcher would like to test for a unit root in a series. She runs the regression
. What should her null hypothesis be assuming that she adopts the
Dickey–Fuller test approach?
(a)*

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(b)
(c)
(d) .
20. Assuming the researcher in Question 19 would like to run an augmented Dickey–
Fuller test instead. What is the appropriate regression she would have to run and the null
hypothesis of the test?
(a)* and , respectively
(b) and , respectively
(c) and , respectively
(d) and , respectively.
21. Two variables are said to be cointegrated if

(a) If the two variables are I(0) and a linear a combination of the two are I(1)
(b) If the two variables are I(1) and a linear a combination of the two are I(1)
(c) If the two variables are I(0) and a linear a combination of the two are I(0)
(d)* If the two variables are I(1) and a linear a combination of the two are I(0).
22. 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
(d) I, II, III, and IV only.
Chapter 9

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1. Volatility clustering is
(a) The tendency for financial asset returns to have distributions that exhibit fat tails
(b)* The tendency for financial asset return volatility to appear in bunches
(c) The tendency for volatility to rise more following a large price fall than following a
price rise of the same magnitude
(d) All of the above.
2. Which of the following is TRUE about ARCH and GARCH models?

(I) They are used for modelling and forecasting volatility
(II) They are non-linear models
(III) They can both be estimated using OLS
(IV) Series estimated using these models must have a unit root process.
(a) I only
(b)* I and II only
3. Which of these cannot be used to test for non-linearity?

(a) Portmanteau tests
(b)* White test
(c) Ramsey’s RESET test
(d) The BDS test.
4. Which of the following statements are true regarding volatility:

(I) It measures the total risk of financial assets
(II) It can be used in computing value-at-risk
(III) It is a component of the Black–Scholes formula for deriving the prices of traded
options
(IV) It can be estimated using the variance of asset returns.
(a) I only
(b) I and II only
5. What are the names of the following models?

(I)
(II)
(III)
(IV)

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(a) GARCH (1), ARCH (1,1), GARCH(q) and ARCH(p,q), respectively

(b)* ARCH(1), GARCH(1,1), ARCH(q) and GARCH(p,q), respectively
(c) ARCH(1), EGARCH(1,1), ARCH(q) and EGARCH(p,q), respectively
(d) EGARCH (1), ARCH(1,1), EGARCH (q) and ARCH(p,q), respectively.
6. What is an appropriate approach to testing for ‘ARCH effects’?

(a)* Run a regression, collect the residuals, regress the squared residuals on their lags and
conduct a hypothesis test to check whether the coefficients of the lagged squared
residuals are equal to zero
(b) Run a regression, collect the fitted values, regress the fitted values on their squared
lags and conduct a hypothesis test to check whether the coefficients of the lagged squared
fitted values are equal to zero
(c) Employ White’s test
7. Which of these is an appropriate technique used in estimating models from the

GARCH family?
(a)* Maximum likelihood
(b) Instrumental variables
(c) Indirect least squares
(d) Ordinary least squares.
8. What are the steps required to estimate an ARCH/GARCH model?

(a) First specify the appropriate equations for the correlation and the variance, then
specify LLF and the computer will generate parameter values that maximise the LLF
(b) First specify the appropriate equations for the median and the variance, then specify
LLF and the computer will generate parameter values that maximise the LLF
(c)* First specify the appropriate equations for the mean and the variance, then specify
LLF and the computer will generate parameter values that maximise the LLF
9. GJR and EGARCH are types of GARCH models that allow for:
(a) An asymmetric response of returns to positive and negative shocks in the dependent
variable
(b) An asymmetric response of returns to positive and negative shocks to its lagged
values
(c) A symmetric response of volatility to positive and negative shocks
(d)* An asymmetric response of volatility to positive and negative shocks.
10. Assume that you have estimated a GJR model of monthly stock returns and you
obtain the following equations:

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Suppose that , what would be the fitted conditional variance for time t if
and then if ?
(a) 1.62 and 1.67, respectively
(c)* 1.59 and 1.64, respectively
11. Suppose that a researcher estimates a GARCH(1,1) model and obtains a log
likelihood function (LLF) value of 71.22. She is interested in testing whether an
ARCH(1) model is a better model at describing volatility. If she estimates a model which
imposes the necessary restrictions and obtains an LLF value of 68.21, what would be the
conclusion of her likelihood ratio test (assuming a 5% significance level)?
(a) Statistical evidence suggesting that ARCH(1) is better than GARCH(1,1)
(b)* Statistical evidence suggesting that ARCH(1) is not better than GARCH(1,1)
(c) Statistical evidence suggesting that GARCH(1,1) is better than ARCH(1)
(d) We cannot say because we would need to know the number of observations.
12. What would typically be the shape of the news impact curve for a series that exactly
followed a GARCH(1,1) process?
(a) It would be asymmetric, with a steeper curve on the left than the right
(b) It would be asymmetric, with a steeper curve on the right than the left
(c) * It would be symmetric about zero
(d) It would be discontinuous about zero.
13. Which of the following are NOT features of an IGARCH(1,1) model?

(i) Forecasts of the conditional variance will converge upon the unconditional variance as
the horizon tends to infinity
(ii) The sum of the coefficients on the lagged squared error and the lagged conditional
variance will be unity
(iii) Forecasts of the conditional variance will decline gradually towards zero as the
horizon tends to infinity
(iv) Such models are never observed in reality.
(a) * (ii) only

(b) (ii) and (iv) only
(c) (ii), (iii), and (iv) only
(d) (i), (ii), (iii), and (iv)
.
14. Which of the following would represent the most appropriate definition for implied
volatility?

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(a) * It is the volatility of the underlying asset’s returns implied from the price of a traded
option and an option pricing model
(b) It is the volatility of the underlying asset’s returns implied from a statistical model
such as GARCH
(c) It is the volatility of an option price implied from a statistical model such as GARCH
(d) It is the volatility of an option price implied from the underlying asset volatility.
15. 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.
16. Which of the following is the most plausible test regression for determining whether a
series y contains ‘ARCH effects’?
a.
b. *
c.
d. .
17. Consider the following conditional variance equation for a GJR model.
ht = α0 + α1 +βht-1+γut-12It-1
where It-1 = 1 if ut-1 < 0
= 0 otherwise
For there to be evidence of a leverage effect, which ONE of the following conditions
must hold?
a. α0 positive and statistically significant
b. * γ positive and statistically significant
c. γ statistically significantly greater than α0
d. α1+β statistically significantly less than γ .
18. Consider the three approaches to conducting hypothesis tests under the maximum
likelihood framework. Which of the following statements are true?
i. The Wald test is based on estimation only under the null hypothesis
ii. The likelihood ratio test is based on estimation under both the null and the
alternative hypotheses
iii. The Lagrange multiplier test is based on estimation under the alternative
hypothesis only

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iv. The usual t- and F-tests are examples of Wald tests.
a. * (ii) and (iv) only

c. (i), (ii), and (iv) only
19. Which one of the following problems in finance could not be usefully addressed by
either a univariate or a multivariate GARCH model?
a. Producing option prices
b. Producing dynamic hedge ratios
c. Producing time-varying beta estimates for a stock
d. * Producing forecasts of returns for use in trading models
e. Producing correlation forecasts for value at risk models.
Chapter 10
1. Threshold autoregressive and Markov switching models:

(a)* Allow us to potentially capture regime switches in a dependent variable
(b) Forecast correlations of two distinct series
(c) Maximise the threshold of autoregressive models
To check for seasonality (day-of-the-week effect) in stock returns of South Korea,

Malaysia, the Philippines, Taiwan, and Thailand, Brooks and Persand (2001) regress
daily returns in each of these countries’ stock market on five dummy variables D1 to D5
representing each day of the week – i.e., D1 for Mondays, D2 for Tuesdays, D3 for
Wednesdays, D4 for Thursdays and D5 for Fridays:
Their results were:

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2. Which market(s) did not display any evidence of day-of-the-week effect?

(a) Thailand, Malaysia and Taiwan
(b) Philippines only
(c) South Korea only
(d)* South Korea and Philippines.
3. A Markov process can be written mathematically as:

(a)
(b)
(c)*
(d) .
4. The unknown parameters of a Markov switching model are usually estimated using:
(a)* Maximum likelihood
(b) Instrumental variables
(c) Indirect least squares
(d) Ordinary least squares.
5. The key difference between threshold autoregressive and Markov switching models is
that:
(a) The latter can be estimated using ordinary least squares while the latter is estimated
using the indirect least squares estimation technique
(b) Under the latter, the state variable is assumed to be known and observable, while it is
latent under the former

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(c)* Under the former, the state variable is assumed to be known and observable, while it
is latent under the latter
6. Which of these equations is a self-exciting threshold autoregressive (SETAR)

model?
(a)* if
if
(b) if
if
(c) if
if
(d) if
if .
7. To compare the goodness of fit of Markov switching and threshold autoregressive

models with linear models, one can compare the residual sums of squares of the two
types of models using an F-test. Is the statement true?
(a) Yes
(b)* No
(c) If the autoregressive model is restricted
(d) Cannot say without knowing the number of regimes in the regime switching models.
8. Suppose that a researcher wishes to test for calendar (seasonal) effects using a dummy
variables approach. Which of the following regressions could be used to examine this?
i. A regression containing intercept dummies
ii. A regression containing slope dummies
iii. A regression containing intercept and slope dummies
iv. A regression containing a dummy variable taking the value 1 for one observation
and zero for all others.
(a) (ii) and (iv) only

(c) * (i), (ii), and (iii) only
(d) (i), (ii), (iii), and (iv).
9. If a series possesses the ‘Markov property’, what would this imply?

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i. The series is path-dependent

ii. All that is required to produce forecasts for the series is the current value of the
series plus a transition probability matrix
iii. The state-determining variable must be observable
iv. The series can be classified as to whether it is in one regime or another regime, but
it can only be in one regime at any one time.
a. * (ii) only
b. (i) and (ii) only
10. Consider the following two equations in a state space model, where yt is the observed
series, and ut and ηt are noise terms.
The two equations would respectively be termed as:

(a) * The measurement equation and the transition equation
(b) The data equation and the Markov equation
(c) The transition equation and the parameter model
(d) The measurement equation and the Markov process.
11. The ratio of the variance of the error term ηt to the variance of the error term ut is used
as the basis of a test for:
(a) * Whether it is necessary to allow for time-varying parameters
(b) Whether the observed series, yt, is excessively noisy
(c) Whether the Markov property holds
(d) Whether the Kalman filter will be efficient.
12. Consider the following two equations in a state space model, where yt is the observed
series, and ut and ηt are noise terms.
What would be the hyperparameters for this model?

(a) The transition matrix, Tt
(b) The state variable, μt
(c) The estimated values of the noise terms (i.e., the values of ut and ηt)
(d) * The variances of the noise terms (i.e., the variances of ut and ηt)’
Chapters 11-14

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1. Which of these are advantages of using panel data?

(I) We can address a broader range of issues and tackle more complex problems than
would be possible with pure time-series or pure cross-sectional data alone
(II) It allows us to increase the number of degrees of freedom
(III) It allows us to increase the power of the tests
(IV) We can remove the impact of certain forms of omitted variables bias in regression
results.
(a) I only
(b) I and II only
2. Which of these is a type of panel estimator approach?

(I) Fixed effects
(II) Random effects
(III) Seemingly unrelated regression effects
(IV) Time-varying effects.
(a) I only
(b)* I and II only
3. Entity fixed effects models

(a)* Allow the intercept in the regression model to differ cross-sectionally but not over
time, while all of the slope estimates are fixed both cross-sectionally and over time
(b) Allow the slope in the regression model to differ cross-sectionally but not over time,
while the intercept estimates are fixed both cross-sectionally and over time
(c) Allow the intercept in the regression model to differ over time, while all of the slope
estimates are different both cross-sectionally and over time
(d) Any of the above could be true depending on the model specification.
4. Running a cross-sectional regression on the time-averaged values of the variables is

known as a:
(a) Within estimator
(b)* Between estimator
(c) Cross-sectional estimator
(d) Demeaned estimator.
5. The acronym LSDV in panel model estimation stands for

(a) Least squares dependent variable

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(b) Limited squares dependent variable

(c)* Least squares dummy variable
(d) Limiting squares dummy variable.
6. Which of the following is a mathematical expression of a time-fixed effects model?

(a)
(b)
(c) ,
(d)* .
7. What of the following is a mathematical expression of a random effects model?

(a)
(b)
(c)* ,
(d) .
8. To test for unit roots in panel data, Levin, Lin and Chu (2002) develop a test based on
the equation . What is the appropriate null
hypothesis for this test?
(a) *
(b)
(c)
(d) .
9. Logit and probit models are more appropriate than linear probability models because:
(a) Logit and probit can estimate probabilities that are negative
(b) Logit and probit cannot estimate probabilities that are greater than one
(c) Logit and probit cannot estimate probabilities that are negative but not greater than
one
(d)* Logit and probit cannot estimate probabilities that are negative or greater than one.
10. Which of the following statements about logit and probit models is true?
(I) They cannot be estimated by ordinary least squares
(II) They can be estimated using maximum likelihood
(III) They can be estimated using non-linear least squares
(IV) They can be estimated using instrumental variables.

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(a) I only
(b) I and II only
11. If the maximised value of the log-likelihood function for a logit model is 34.55 and
for a restricted model where all of the slope parameters are set to zero is 30.67, what is
the pseudo-R2?
(a) 0.13
(b)* –0.13
(c) 0.11
(d) –0.11.
12. Appropriate modelling of limited dependent variables that are assigned numerical
values having a natural ordering can be done using:
(I) Probit models
(II) Logit models
(III) Ordered probit models
(IV) Ordered logit models.
(a) I only
(b) I and II only
(c) II and III only
(d)* III and IV only.
13. In the context of an event study, a cumulative abnormal return:
(a) Is calculated by summing the individual returns over all the firms separately for each
day
(b) * Is calculated by summing the individual returns over time for each firm separately
(c) Takes the geometric product of the individual returns over all the firms separately for
each day
(d) Takes the geometric product of the individual returns over time for each firm
separately.
14. Which of the following statements is TRUE concerning the calendar time
methodology sometimes used in event studies?
(a) It will weight all the firms in the sample that underwent the event equally
(b) It can involve the calculation of a buy-and-hold abnormal return
(c) If the slope parameter in the test regression is positive and significant, this will
provide evidence of an abnormal return in the event study
(d) *It will give more weight in the sample to firms which underwent the event at a time
when few other firms did so.
15. The traditional Fama–MacBeth approach to tests of the CAPM involves:
(a) * A set of time-series regressions to estimate the betas for each stock and then a cross-
sectional regression to estimate the risk premium

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(b) A set of cross-sectional regressions to estimate the betas and then a time-series
regression to estimate the risk premium
(c) A single cross-sectional regression to estimate the CAPM beta
(d) A time-series regression to estimate the betas for each stock and then another time-
series regression to estimate the risk premium.
16. In the Fama–MacBeth regressions, the parameter estimates in the second stage are
interpreted as:
(a) Factor loadings
(b) * Factor risk premia
(c) Average returns for each stock
(d) The volatilities of returns for each stock.
17. In the Fama–MacBeth regressions, the parameter estimates in the first stage are
interpreted as:
(a) * Factor loadings
(b) Factor risk premia
(c) Average returns for each stock
(d) The volatilities of returns for each stock.
18. In Fama–French (1993)- and Carhart (1994)-type models, for there to be no evidence
of outperformance by a fund manager, we would require:
(a) The intercept is positive but not statistically significant
(b) The intercept is not positive and significant and slope estimates are all insignificant
(c) * The intercept is not positive and significant
(d) The slope estimates are all insignificant.
19. If we use the block maximum approach to estimating the parameters of a member of
the extreme value family of distributions and we select a large number of short blocks,
which of the following is a likely disadvantage?
(a) * A number of data points would be classified as extreme when they are not, leading
to bias in the shape parameter estimate
(b) Too few data points would be classified as extreme, leading to excessive noise in the
shape parameter estimate
(c) Too few data points would be classified as extreme, leading to bias in the shape
parameter estimate
(d) A number of data points would be classified as extreme when they are not, leading to
excessive noise in the shape parameter estimate.
20. Which of the following distributions would be most appropriate for modelling the
central part of the distribution of a set of stock returns?
(a) Gumbel
(b) Fréchet
(c) Weibull
(d) * Normal.

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21. If we use the peaks-over-threshold approach to estimating the parameters of an

extreme value distribution, if we use a value of U, the threshold, that is too high (i.e., too
far into the tail), which of the following is a likely disadvantage?
(a) A number of data points would be classified as extreme when they are not, leading to
bias in the shape parameter estimate
(b) * Too few data points would be classified as extreme, leading to excessive noise in the
shape parameter estimate
(c) Too few data points would be classified as extreme, leading to bias in the shape
parameter estimate
(d) A number of data points would be classified as extreme when they are not, leading to
excessive noise in the shape parameter estimate.

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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
The price of a house is best described as what type of number?
Cardinal
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
Suppose that observations are available on the monthly bond prices of 100 companies for
5 years. What type of data are these?
Panel
The score associated with a credit rating is best described as a/an:
Ordinal number
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
The yield to maturity on a bond is best described as a/an:
Cardinal number
A share price is quoted in units of pennies. Which term best describes this sort of data?
Discrete
Which of the following statements is FALSE concerning log-price relatives (log returns)?
They can be validly averaged cross-sectionally
Which of the following statements is TRUE concerning simple returns?
They can be validly averaged cross-sectionally
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:
Return = [(1+0.1) (1+–0.06) (1+0.13) (1+–0.08)] -1 = 0.07495, which is 7%
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:
Return = 10 + –6 + 13 + –8 = 9%.
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%?
86.4 – (1.2 ´ 25) = 56.4
Given the scenario in question 1, How many stocks would be required to achieve a
volatility of 10%?
64
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

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The point at which a function crosses the x-axis is called:

A root
If the relationship between two variables is y = 3x3 + 2x2 + x – 6, what is the functional
form that links them?
Non-linear
If the relationship between two variables is y = –4x + 2, what is the functional form that
links them?
Linear
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
If we know that relationship y = a + bx yields a horizontal line, which restriction must
hold?
b=0
If we know that relationship y = a + bx yields a line at 45 degrees to the x-axis, which
restriction must hold?
b=1
Which type of function y plotted against x always has a gradient that is increasing in x?
An exponential function
A cubic function, y = f(x) will have how many UNIQUE roots?
At most three
Which shape will be the function y = –3 + 2x – x2?
(i) Always upward sloping
(ii) Always downward sloping
(iii) U-shaped
(iv) ∩-shaped
What are the roots of the equation y = x2 – 9x?
0 and 9
A plot of the function y = log(x) will:
Cross the x-axis at one
Another way of writing log (x + y) is:
None of the above apply.
Log (0) is:
Undefined
Writing out all the terms in the expression would lead to:
3
(i) 3x
(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

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(iv) Zero at a turning point

(i), (ii) and (iv) only
The derivative of y = 1/x is:
1/x²
The derivative of 5log(x) is:
5/x
The second derivative of 8x2 is:
16
The second derivative of -4x is:
0
The partial derivative of 6x2 + 2x + 3xy + 4y – 2y2 with respect to y is:
3x + 4-4y
What are the dimensions of the matrix

2x3
Which of the following is an identity matrix?
(i) (1)
(ii)
(iii)
(iv)
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
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
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
The inverse of the matrix is:
(i)
(ii)
(iii)
(iv) Undefined

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The matrix is:

(i) Square
(ii) Singular
(iii) Non-invertible
(iv) Of full rank
(i), (ii) and (iii) only
The determinant of a singular matrix will be:
0
What are the eigenvalues of the matrix

0 and 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) only
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) only
Which of the following statements is TRUE concerning the standard regression model?
y has a probability distribution
Which of the following statements is TRUE concerning OLS estimation?
OLS minimizes 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)
7. Which of the following statements concerning the regression population and sample is
FALSE?

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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), and (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 would be termed “best”
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.
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) and (iii) only
16. The following regression results are gained for the model , estimated
using 100 observations, and where standard errors are presented in parentheses:

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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
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?
(-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 null would be rejected if a 5% size of test were used.
(i), (ii), and (iii) only
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

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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
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) and (iv) only
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

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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
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
An AR (2)

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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
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

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(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

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(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 penalizes 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
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
The “within transform” involves

Subtracting the mean of each entity away from each observation on that entity
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
Consider the following equation and determine the class of model that it best represents:
An entity fixed effects model
The fixed effects panel model is also sometimes known as

The least squares dummy variables approach
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

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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
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
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
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
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
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
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

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(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
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
Panel unit root tests with common alternative hypotheses assume:

Each series must follow the same stochastic process under the alternative hypothesis
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
Under the matrix notation for the classical linear regression model, y = Xβ + u, what are
the dimensions of u? T x 1
What are the dimensions of û'û? 1 x 1

. 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

What is the estimate for the standard error for β2? 0.12
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
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
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
Consider the following regression equation estimated using 1,000 daily observations.

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(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)
(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) only
(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
(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
(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

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(iii) β1 = 0 and β2 = 0 and β3 = 0 and β4 = 0

(iv) β1 = 0 or β2 = 0 or β3 = 0 or β4 = 0
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.
Consider the following 2 regression models:
Model 1:
Model 2:
(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) only
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.
Which of the following is not an advantage of quantile regressions compared with
standard OLS? Quantile regressions do not require the homoscedasticity assumption
What does a quantile regression measure?
The entire distribution of y given the distributions of the explanatory variables
The parameters of a quantile regression function are estimated by:
Minimizing the sum of the weighted absolute values of the residuals
3. 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

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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
6. Consider the following two ways of expressing the Dickey-Fuller test regression:
Which one of the following restrictions must hold?

(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
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

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(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:

(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.
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?
1
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:

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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
0
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
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

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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
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
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

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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

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(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
Câu Hỏi 7
Which of the following statements are true about parameter stability tests? (1) Parameter
stability tests test the assumption that the estimated parameters of a model are constant
for the entire sample. (II) Chow test and predictive failure tests are two types of
parameter stability tests, (III) Backward and forward predictive failure tests are two types
of parameter stability tests, (IV) Parameter stability tests examine violations of the
classical linear regression model assumptions
d. L. II. III and IV
Câu Hỏi 8
Which of the following null hypotheses could we test using an F-test? (i) b2 = 0, (ii) b2 =
1 and b3 + 4 = 1. (iii) b3xb4 = 1, (iv) b2 + b3 + 4 = 1
a. i, ii, and (iv) only
Câu Hỏi 9
Appropriate modelling of limited dependent variables that are assigned numerical values
having a natural ordering can be done using: (1) Probit models. (1) Logit models, (III)
Ordered probit models, (IV) Ordered logit models
III and IV only
Câu Hỏi 10
What would be the consequences for the OLS estimator if autocorrelation is present in a
regression model but ignored?
d. It will be inefficient
Câu Hỏi 11
Which of the following would NOT be a potential remedy for the problem of
multicollinearity between regressors?
a. Transforming the data into logarithms
Câu Hỏi 12
Which estimation results of the two methods will give the same regression results of
slope coefficients?
d. LSDV and within transformation
Câu Hỏi 13
Which of these is not a consequence of ignoring autocorrelation if it is present?
c. The coefficient estimates derived using OLS are biased
Câu Hỏi 14
Data that have been collected over a period of time on one or more variables is referred to
as
d. Time series data

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Câu Hỏi 15
If the residuals of a regression on a large sample are found to be heteroscedastic which of
the following might be a likely consequence? (1) The coefficient estimates are biased, (ii)
The standard error estimates for the slope coefficients may be too small, (iii) Statistical
inferences may be wrong
b. (ii) and (ii) only
Câu Hỏi 16
Which of these is a test for heteroscedasticity?
d. White test
Câu Hỏi 17
Entity fixed effects models
c. Allow the intercept in the regression model to differ cross-sectionally but not over
time, while all of the slope estimates are fixed
both cross-sectionally and over time
Câu Hỏi 18
The method of estimating econometric models which involves fitting a line to the data by
minimising the sum of squared residuals is the
b. Method of ordinary least squares
Câu Hỏi 19
Which one of the following is NOT an assumption of the classical linear regression
model?
d. The dependent variable is not correlated with the disturbance terms
20. To deal with endogeneity, which regression model can be applied?
d. instrumental variable regression
Câu Hỏi 21
If a regression equation contains an irrelevant variable, the parameter estimates will be
a. Consistent and asymptotically efficient but biased
Câu Hỏi 22
To select between fixed effect and random effects models, which test should be used?
C. Hausman test
Câu Hỏi 23
What is the most appropriate interpretation of the assumption cov(ui, uj)=0 concerning
the regression disturbance terms?
The errors are linearly independent of one another
Câu Hỏi 24
Standard errors
c. Give us an idea of the precision of estimates of alpha and beta
Câu Hỏi 25
Which of these is not a viable 'solution' for heteroscedasticity?
c. Taking the first differences of the series
Câu Hỏi 1
Suppose you have calculated the following regression results: y = 1.25 +0.64x. The
standard errors of alpha and beta are 1.22 and 0.58, respectively. Using the test of

lOMoARcPSD|20630121
significance approach, what is the test statistic value of a hypothesis to test whether the
true value of beta statistically different from zero?
b. 1.10
Câu Hỏi 2
Which of the following conditions must be fulfilled for the Durbin Watson test to be
valid? (i) The regression includes a constant term, (ii) The regressors are non-stochastic,
(iii) There are no lags of the dependent variable in the regression, (iv) There are no lags
of the independent variables in the regression
b. (i), (ii) and (iii) only
Câu Hỏi 3
Which of the following would probably NOT be a potential "cure" for non-normal
residuals?
b. Transforming two explanatory variables into a ratio
Câu Hỏi 4
Which one of the following is the most appropriate as a definition of R2 in the context
that the term is usually used?
d. It is the proportion of the total variability of y about its mean value that is explained by
the model
Câu Hỏi 5
Which of the following is a correct interpretation of a "95% confidence interval" for a
regression parameter?
d. We are 95% sure that the interval contains the true value of the parameter
Câu Hỏi 6
To test the validity of instruments in the 2SLS model, which test can be used?
d. Sargan/Hansen test test of overidentifying)
Chapter 1: Economic Questions and Data
KTL_001_C1_1: Analyzing the behavior of unemployment rates across U.S. states in
March
of 2010 is an example of using
O time series data.
O panel data.
cross-sectional data.
O experimental data.
KTL_001_C1_2: Studying inflation in the United States from 1970 to 2010 is an
example of
using
O randomized controlled experiments.
time series data.
O panel data.
O cross-sectional data.

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KTL_001_C1_3: Analyzing the effect of minimum wage changes on teenage

employment
across the 48 contiguous U.S. states from 1980 to 2010 is an example of using
O time series data.
panel data.
O having a treatment group vs. a control group, since only teenagers receive minimum
wages.
O cross-sectional data.
KTL_001_C1_4: Econometrics can be defined as follows with the exception of
O the science of testing economic theory.
O fitting mathematical economic models to real-world data.
O a set of tools used for forecasting future values of economic variables.
measuring the height of economists.
KTL_001_C1_5: The accompanying graph
is an example of
○ experimental data.
○ cross-sectional data.
a time series.
○ longitudinal data.
KTL_001_C1_6: One of the primary advantages of using econometrics over typical

results from economic theory, is that
● it potentially provides you with quantitative answers for a policy problem rather than
simply suggesting the direction (positive/negative) of the response.
○ teaching you how to use statistical packages.

lOMoARcPSD|20630121
○ learning how to invert a 4 by 4 matrix.

○ all of the above.
KTL_001_C1_7: In a randomized controlled experiment

○ you control for the effect that random numbers are not truly randomly generated
● there is a control group and a treatment group.
○ you control for random answers.
○ the control group receives treatment on even days only.
KTL_001_C1_8: The reason why economists do not use experimental data more
frequently is for all of the following reasons except that real-world experiments
○ with humans are difficult to administer.
○ are often unethical.
● cannot be executed in economics.
○ have flaws relative to ideal randomized controlled experiments.
KTL_001_C1_9: The most frequently used experimental or observational data in

econometrics are of the following type:
○ randomly generated data.
○ time series data.
○ panel data.
● cross-sectional data.
KTL_001_C1_10: In the graph below, the vertical axis represents average real GDP
growth for 65 countries over the period 1960-1995, and the horizontal axis shows the
average trade share within these countries.

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This is an is an example of
○ experimental data.
● cross-sectional data.
○ a time series.
○ longitudinal data.
Chapter 2: Review of Probability

KTL_001_C2_1: The expected value of a discrete random variable
○ is the outcome that is most likely to occur.
○ can be found by determining the 50% value in the c.d.f.
○ equals the population median.
● is computed as a weighted average of the possible outcome of that random variable,
where the weights are the probabilities of that outcome.
KTL_001_C2_2: For a normal distribution, the skewness and kurtosis measures are as
follows:
○ 1.96 and 4
○ 0 and 0
● 0 and 3
○ 1 and 2
KTL_001_C2_3: The correlation between X and Y
○ cannot be negative since variances are always positive.
○ is the covariance squared.
● can be calculated by dividing the covariance between X and Y by the product of the
two standard deviations.

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○ is given by corr ( X , Y ) = c o v ( X , Y ) v a r ( X ) v a r ( Y )
KTL_001_C2_4: Assume that Y is normally distributed N ( μ , σ 2 ) N(μ,σ2). Moving
from the mean ( μ μ) 1.96 standard deviations to the left and 1.96 standard deviations to
the right, then the area under the normal p.d.f is
○ 0.67
○ 0.05
● 0.95
○ 0.33
KTL_001_C2_5: The variance of Y, σY2is given by the following formula:

lOMoARcPSD|20630121
KTL_001_C2_8: Assume that you assign the following subjective probabilities for your
final grade in your econometrics course (the standard GPA scale of 4 = A to 0 = F
applies):
The expected value is:

○ 3.0
○ 3.5
● 2.78
○ 3.25
KTL_001_C2_9: The mean and variance of a Bernoulli random variable are given as
○ cannot be calculated
○ np and np(1-p)
○ p and p(1-p)
● p and (1-p)
KTL_001_C2_10: Consider the following linear transformation of a random variable y =

x – μ x σ x y=x–μxσx, where μ x μx is the mean of x and σ x σx is the standard deviation.
Then the expected value and the standard deviation of Y are given as
● 0 and 1
○ 1 and 1
○ Cannot be computed because Y is not a linear function of X
○
Chapter 3: Review of Statistics
KTL_001_C3_1: An estimator ^ μ Y μ^Y of the population value μ Y μY is consistent if
○ ^ μ Y → μ Y μ^Y→μY.
○ its mean square error is the smallest possible.
○ Y is normally distributed.
● ¯ Y → 0 Y¯→0.
KTL_001_C3_2: A type II error is
○ typically smaller than the type I error.

lOMoARcPSD|20630121
○ the error you make when choosing type II or type I.

● the error you make when not rejecting the null hypothesis when it is false.
○ cannot be calculated when the alternative hypothesis contains an “=”.
KTL_001_C3_3: A large p-value implies
○ rejection of the null hypothesis.
● a large t-statistic.
○ a large ¯ Y a c t Y¯act.
○ that the observed value ¯ Y a c t Y¯act is consistent with the null hypothesis.
KTL_001_C3_4: The power of the test

○ is the probability that the test actually incorrectly rejects the null hypothesis when the
null is true.
● depends on whether you use Y or Y2 for the t-statistic.
○ is one minus the size of the test.
○ is the probability that the test correctly rejects the null when the alternative is true.
KTL_001_C3_5: The following statement about the sample correlation coefficient is

true.
KTL_001_C3_6: When testing for differences of means, the t-statistic ,

where has
○ a Student t distribution if the population distribution of Y is not normal
○ a student t distribution if the population distribution of Y is normal
○ a normal distribution even in small samples
● cannot be computed unless nm=nw
KTL_001_C3_7: When testing for differences of means, you can base statistical
inference on the
● Student t distribution in general
○ Normal distribution regardless of sample size
○ Student t distribution if the underlying population distribution of Y is normal, the two
groups have the same variances, and you use the pooled standard error formula
○ Chi-squared distribution with (nm+nw - 2) degrees of freedom

lOMoARcPSD|20630121
KTL_001_C3_8: Assume that you have 125 observations on the height (H) and weight
(W) of your peers in college. Let SE(HW) = 68, SE(H) = 3.5, SE(W) = 68. The sample
correlation coefficient is
○ 1.22
● 0.50
○ 0.67
○ Cannot be computed since males and females have not been separated out.
KTL_001_C3_9: You have collected data on the average weekly amount of studying
time (T) and grades (G) from the peers at your college. Changing the measurement from
minutes into hours has the following effect on the correlation coefficient:
○ decreases the r(TG) by dividing the original correlation coefficient by 60
○ results in a higher r(TG)
● cannot be computed since some students study less than an hour per week
○ does not change the r(TG)
KTL_001_C3_10: A low correlation coefficient implies that
○ the line always has a flat slope
○ in the scatterplot, the points fall quite far away from the line
● the two variables are unrelated
○ you should use a tighter scale of the vertical and horizontal axis to bring the
observations closer to the line

lOMoARcPSD|20630121

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4. Consider the following graphs.

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Which of the following statements is true?

5. Which of the following statements is true about graph (A) above?

6. The simplest possible way of writing 3x5 × 7x3 is:

7. What are the roots of the equation y = 2x2 + 2x – 4?

8. What are the roots of the equation y = x2 + 2x – 6 closest to?

9. ‘x to the power 3’ could be written:

10. Another way of writing elog(x) is:

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11. Log(1) is:

13. is equal to:

14. What is the (first order) derivative of the function ?

15. What is the second order derivative of the function ?

16. The derivative of log(5x) is:

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17. The derivative of e4x-2 is:

18. If A is of dimension 1 × 4 and B is of dimension 4 × 1, what is the most accurate term

19. If matrices and , what is AB?

20. The rank of matrices A and B from Question 19 are:

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(d) 3 and 1, respectively.

22. What is the inverse of matrix ?

23. The rank of a square matrix is also:

24. The trace of matrix C is

26. The central limit theorem states that

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28. Consider the following two graphs:

Which of the following statements is true if A represents a normal distribution?

(a) Both (I) and (III) are true

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(c)* Only (I) is true

30. What are the roots of the equation y = 3 + 4x + 2x2?

31. (x3)2 simplifies to

33. What is k=13k3?

34. The second order derivative of a quadratic function will be:

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Correct answers denoted by an asterisk.

1. Financial econometrics can best be described as

2. Which of the following is a serious problem encountered by applied econometricians

3. Which of these is a characteristic of financial data?

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(b) Time-cross-sectional data

6. Data that have both time series and cross-sections is referred to as

9. What is the 2008 average annual rent in 2012 terms?

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10. What is the 2012 average annual rent in 2008 terms?

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Correct answers denoted by an asterisk.

1. Regression is concerned with describing and evaluating the relationship between

4. Which of these is not a standard method for estimating econometric models?

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What is the estimated alpha ( ) for Fund ABC?