Questions and Answers of Econometric Analysis

Highlight the problems that may occur if non-stationary data are used in their levels form AppendixLO1
What are the units of R2?AppendixLO1
Re-open the Macro file and apply the same APT-type model to some of the other time-series of stock returns contained in the CAPM-file.(a) Run the stepwise procedure in each case. Is the same sub-set
Re-open the CAPM Eviews file and estimate CAPM betas for each of the other stocks in the file.(a) Which of the stocks, on the basis of the parameter estimates you obtain, would you class as defensive
A researcher estimates the following two econometric models yt = β1 + β2x2t + β3x3t + ut (3.56)yt = β1 + β2x2t + β3x3t + β4x4t + vt (3.57)where ut and vt are iid disturbances and x3t is an
A researcher estimates the following econometric models including a lagged dependent variable yt = β1 + β2x2t + β3x3t + β4 yt−1 + ut (3.54)yt = γ1 + γ2x2t + γ3x3t + γ4 yt−1 + vt
You estimate a regression of the form given by (3.52) below in order to evaluate the effect of various firm-specific factors on the returns of a sample of firms. You run a cross-sectional regression
You decide to investigate the relationship given in the null hypothesis of question 2, part (c). What would constitute the restricted regression?The regressions are carried out on a sample of 96
Which would you expect to be bigger – the unrestricted residual sum of squares or the restricted residual sum of squares, and why?AppendixLO1
Which of the above null hypotheses constitutes ‘THE’ regression F-statistic in the context of (3.51)? Why is this null hypothesis always of interest whatever the regression relationship under
Which of the following hypotheses about the coefficients can be tested using a t-test? Which of them can be tested using an F-test? In each case, state the number of restrictions.(a) H0 : β3 = 2(b)
By using examples from the relevant statistical tables, explain the relationship between the t- and the F-distributions.For questions 2–5, assume that the econometric model is of the form yt = β1
Estimate multiple regression models and test multiple hypotheses in EViews AppendixLO1
Derive the OLS parameter and standard error estimators using matrix algebra AppendixLO1
Form a restricted regression AppendixLO1
Determine how well a model fits the data AppendixLO1
Test multiple hypotheses using an F-test AppendixLO1
Construct models with more than one explanatory variable AppendixLO1
Using EViews, select one of the other stock series from the ‘capm.wk1’file and estimate a CAPM beta for that stock. Test the null hypothesis that the true beta is one and also test the null
Are hypotheses tested concerning the actual values of the coefficients(i.e. β) or their estimated values (i.e. βˆ) and why?AppendixLO1
Form and interpret a 95% and a 99% confidence interval for beta using the figures given in question 7.AppendixLO1
The analyst also tells you that shares in Chris Mining PLC have no systematic risk, in other words that the returns on its shares are completely unrelated to movements in the market. The value of
The capital asset pricing model (CAPM) can be written as E(Ri ) = R f + βi [E(Rm) − R f ] (2.62)using the standard notation.The first step in using the CAPM is to estimate the stock’s beta using
Which of the following models can be estimated (following a suitable rearrangement if necessary) using ordinary least squares (OLS), where X, y, Z are variables and α, β, γ are parameters to be
What five assumptions are usually made about the unobservable error terms in the classical linear regression model (CLRM)? Briefly explain the meaning of each. Why are these assumptions
What is an estimator? Is the OLS estimator superior to all other estimators? Why or why not?AppendixLO1
Explain, with the use of equations, the difference between the sample regression function and the population regression function.AppendixLO1
(a) Why does OLS estimation involve taking vertical deviations of the points to the line rather than horizontal distances?(b) Why are the vertical distances squared before being added together?(c)
Estimate regression models and test single hypotheses in EViews AppendixLO1
Interpret p-values AppendixLO1
Test hypotheses using the test of significance and confidence interval approaches AppendixLO1
Discuss the factors that affect the sizes of standard errors AppendixLO1
Explain the desirable properties that a good estimator should have AppendixLO1
Derive the OLS formulae for estimating parameters and their standard errors AppendixLO1
Re-open the ‘macro.wf1’ and apply the stepwise procedure including all of the explanatory variables as listed above, i.e. ersandp dprod dcredit dinflation dmoney dspread rterm with a strict 5%
Explain why it is not possible to include an outlier dummy variable in a regression model when you are conducting a Chow test for parameter stability. Will the same problem arise if you were to
Why is it desirable to remove insignificant variables from a regression?AppendixLO1
For the same model as above, and given the following results, do a forward and backward predictive failure test:1981M1–1995M12 rt = 0.0215 + 1.491 rmt RSS = 0.189 T = 180 (4.83)1981M1–1994M12 rt
(a) Explain the term ‘parameter structural stability’?(b) A financial econometrician thinks that the stock market crash of October 1987 fundamentally changed the risk–return relationship given
(a) Why is it necessary to assume that the disturbances of a regression model are normally distributed?(b) In a practical econometric modelling situation, how might the problem that the residuals are
What might Ramsey’s RESET test be used for? What could be done if it were found that the RESET test has been failed?AppendixLO1
Calculate the long-run static equilibrium solution to the following dynamic econometric modelyt = β1 + β2x2t + β3x3t + β4 yt−1 + β5x2t−1+β6x3t−1 + β7x3t−4 + ut AppendixLO1
(a) What do you understand by the term ‘autocorrelation’?(b) An econometrician suspects that the residuals of her model might be autocorrelated. Explain the steps involved in testing this theory
(a) State in algebraic notation and explain the assumption about the CLRM’s disturbances that is referred to by the term‘homoscedasticity’.(b) What would the consequence be for a regression
A researcher estimates the following model for stock market returns, but thinks that there may be a problem with it. By calculating the t-ratios, and considering their significance and by examining
What pattern(s) would one like to see in a residual plot and why?AppendixLO1
Are assumptions made concerning the unobservable error terms (ut ) or about their sample counterparts, the estimated residuals ( ˆut )? Explain your answer.AppendixLO1
Conduct diagnostic tests in EViews.AppendixLO1
Appraise different philosophies of how to build an econometric model AppendixLO1
Investigate whether the model parameters are stable AppendixLO1
Determine whether the residual distribution from a regression differs significantly from normality AppendixLO1
Test for whether the functional form of the model employed is appropriate AppendixLO1
Highlight the advantages and disadvantages of dynamic models AppendixLO1
Distinguish between the Durbin--Watson and Breusch--Godfrey tests for autocorrelation AppendixLO1
Explain the impact of heteroscedasticity or autocorrelation on the optimality of OLS parameter and standard error estimation AppendixLO1
Describe the steps involved in testing regression residuals for heteroscedasticity and autocorrelation AppendixLO1
The game of blackjack (sometimes called “21”) is a popular casino game. The goal is to have a hand with a value of 21 or as close to 21 as possible without exceeding 21. The player and the dealer
Rock-Paper-Scissors is a simple game in which two players compete by simultaneously choosing rock, paper, or scissors. According to the classic rules of the game, paper beats rock, scissors beats
One cause of the downtime in Problem 3 was traced to a specific piece of computer hardware. Management believes that switching to a different hardware component will result in the following
County Beverage Drive-Thru, Inc., operates a chain of beverage supply stores in northern Illinois. Each store has a single service lane; cars enter at one end of the store and exit at the other end.
Harbor Dunes Golf Course was recently honored as one of the top public golf courses in South Carolina. The course, situated on land that was once a rice plantation, offers some of the best views of
What will your portfolio be worth in 10 years? In 20 years? When you stop working? The Human Resources Department at Tri-State Corporation was asked to develop a financial planning model that would
Develop your own worksheet for the Butler inventory simulation model shown in Figure 16.10. Suppose that management prefers not to charge for loss of goodwill. Run the Butler inventory simulation
Develop your own worksheet for the Butler inventory simulation model shown in Figure 16.10. Suppose that management prefers not to charge for loss of goodwill. Run the Butler inventory simulation
Develop your own worksheet for the PortaCom simulation model described in Section 16.1. a. Compute the mean profit, the minimum profit, and the maximum profit. b. What is your estimate of
Over a five-year period, the quarterly change in the price per share of common stock for a major oil company ranged from -8% to 12%. A financial analyst wants to learn what can be expected for price
Office Equipment, Inc. (OEI) leases automatic mailing machines to business customers in Fort Wayne, Indiana. The company built its success on a reputation of providing timely maintenance and repair
Regional Airlines is establishing a new telephone system for handling flight reservations. During the 10:00 A.M. to 11:00 A.M. time period, calls to the reservation agent occur randomly at an average
A fast-food franchise is considering operating a drive-up window food-service operation. Assume that customer arrivals follow a Poisson probability distribution, with an arrival rate of 24 cars per
The River City Fire Department (RCFD) fights fires and provides a variety of rescue operations in the River City metropolitan area. The RCFD staffs 13 ladder companies, 26 pumper companies, and
Managers at Wagner Fabricating Company are reviewing the economic feasibility of manufacturing a part that the company currently purchases from a supplier. Forecasted annual demand for the part is
The port of Lajitas has three loading docks. The distance (in meters) among the loading docks is given in the following table:Three tankers currently at sea are coming into Lajitas. It is necessary
Using the return data in Table 12.17, construct a portfolio from Apple, AMD, and Oracle that matches the Information Technology S&P index as closely as possible. Use the return data for the
Formulate and solve the Markowitz portfolio optimization model that was introduced in Problem 18 using the return data in columns five, six, and seven of Figure 12.17. In this case, nine scenarios
Formulate and solve the Markowitz portfolio optimization model that was introduced in Problem 18 using the return data in columns five, six, and seven of Figure 12.17. In this case, nine scenarios
Harry Markowitz received the 1990 Nobel Prize for his path-breaking work in portfolio optimization. One version of the Markowitz model is based on minimizing the variance of the portfolio subject to
Harry Markowitz received the 1990 Nobel Prize for his path-breaking work in portfolio optimization. One version of the Markowitz model is based on minimizing the variance of the portfolio subject to
Harry Markowitz received the 1990 Nobel Prize for his path-breaking work in portfolio optimization. One version of the Markowitz model is based on minimizing the variance of the portfolio subject to
Reconsider the Leisure Airlines problem from Section 12.2. Suppose that as of May 1 the following number of seats have been sold: a. Determine how many seats are still available for sale on
In Section 12.1 data envelopment analysis was used to evaluate the relative efficiencies of four hospitals. Data for three input measures and four output measures were provided in Tables 12.1 and
Buckeye Manufacturing produces heads for engines used in the manufacture of trucks. The production line is highly complex, and it measures 900 feet in length. Two types of engine heads are produced
Using aggressive mail promotion with low introductory interest rates, Yeager National Bank (YNB) built a large base of credit card customers throughout the continental United States. Currently, all
The Darby Company manufactures and distributes meters used to measure electric power consumption. The company started with a small production plant in El Paso and gradually built a customer base
Solutions Plus is an industrial chemicals company that produces specialized cleaning fluids and solvents for a wide variety of applications. Solutions Plus just received an invitation to submit a bid
Cleveland Area Rapid Delivery (CARD) operates a delivery service in the Cleveland metropolitan area. Most of CARD’s business involves rapid delivery of documents and parcels between offices during
Duke Energy manufactures and distributes electricity to customers in the United States and Latin America. Duke Energy acquired Cinergy Corporation in 2005, which had generating facilities and energy
Davis Instruments has two manufacturing plants located in Atlanta, Georgia. Product demand varies considerably from month to month, causing Davis extreme difficulty in workforce scheduling. Recently
The Scottsville Textile Mill produces five different fabrics. Each fabric can be woven on one or more of the mill’s 38 looms. The sales department’s forecast of demand for the next month is shown
Phoenix Computer manufactures and sells personal computers directly to customers. Orders are accepted by phone and through the company’s website. Phoenix will be introducing several new laptop
The Flamingo Grill is an upscale restaurant located in St. Petersburg, Florida. To help plan an advertising campaign for the coming season, Flamingo’s management team hired the advertising firm of
Morton Financial must decide on the percentage of available funds to commit to each of two investments, referred to as A and B, over the next four periods. The following table shows the amount of new
The Ferguson Paper Company produces rolls of paper for use in cash registers. The rolls, which are 200 feet long, are produced in widths of 11⁄2, 21⁄2, and 31⁄2 inches. The production process
The production manager for the Classic Boat Corporation must determine how many units of the Classic 21 model to produce over the next four quarters. The company has a beginning inventory of 100
As part of the settlement for a class action lawsuit, Hoxworth Corporation must provide sufficient cash to make the following annual payments (in thousands of dollars): The annual
Gulf Coast Electronics is ready to award contracts for printing its annual report. For the past several years, the four-color annual report has been printed by Johnson Printing and Lakeside Litho. A
The program manager for Channel 10 would like to determine the best way to allocate the time for the 11:00–11:30 evening news broadcast. Specifically, she would like to determine the number of
Cranberries can be harvested using either a “wet” method or a “dry” method. Dry-harvested cranberries can be sold at a premium, while wet-harvested cranberries are used mainly for cranberry
Davison Electronics manufactures two LCD television monitors, identified as model A andmodel B. Each model has its lowest possible production cost when produced on Davison’s new production line.
The Porsche Club of America sponsors driver education events that provide highperformance driving instruction on actual racetracks. Because safety is a primary consideration at such events, many
Tucker Inc. produces high-quality suits and sport coats for men. Each suit requires 1.2 hours of cutting time and 0.7 hours of sewing time, uses 6 yards of material, and provides a profit

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