Questions and Answers of Introductory Econometrics Modern

1 All investors would take a position on the efficient frontier, where all investment sets are maximizing utility. Recall that investors are risk-averse, utility-maximizing agents and focus only on
● The equity premium puzzle
● Some extensions/variants of CAPM
● Empirical evidence on CAPM and Roll’s Critique
● Econometric methodologies in testing the CAPM
● The capital asset pricing model (CAPM)
5 What do you think the success of fundamentalists and/or chartists would be in an efficient market?
One explanation for departures from the EMH is that investors do not always properly react to new information. Explain why and trace some implications.
3 Do you think expected returns should be higher in good economic times, or bad economic times?
2 Why during bad economic times do we see low stock prices and high dividend–price ratios, followed, on average, by good returns? Develop the argument.
(b) This graph shows the hypothetical path of a stock’s cumulative abnormal return (CAR) 10 days before a public announcement and 5 days after the announcement.1 What would happen to market
(a) This graph shows the S&P 500’s current and one-day lagged returns during August 2–4, 2019.
11 Inspect the graphs that follow and explain what you see in terms of market efficiency and its three forms.
10 Discuss why some studies have found that value stocks tended to have higher returns than growth stocks, based on price–earnings and price-to-book-value ratios
9 What is the behavioral critique?
8 Develop an argument about the predictability of stock returns from dividend or earnings yields in an efficient and irrational market.
7 What are the differences between the cumulative abnormal return (CAR) and the buy-and-hold abnormal return (BAHAR)? What are the differences between BAHAR and Jensen’s alpha?
6 A stock’s return, rt, at time t, can be expressed mathematically as rt = a + b rmt + et where rmt is the market’s rate of return during the period. Interpret all model parameters. How can you
Explain the economic significance of market efficiency tests
4 If you run a regression of returns on lagged (past) returns, explain the possible values of the slope coefficient.
3 What value for b do we expect for this regression, Rt+1 = a + bXt + ut+1, in the classic ‘efficient markets’ view? Xt can be any variable. Interpret a test on b.
2 What are the sufficient and necessary conditions for an efficient market?
1 State the argument that stock prices should follow a random walk.
● Market anomalies way of thinking about financial markets and the economy
● Selected empirical evidence on short-term and long-term patterns in stock returns
● Other models for testing EMH (univariate, multivariate)
● The Event Study design
● Other tests of market efficiency
● Parametric and nonparametric tests of market efficiency
● The efficient market hypothesis (EMH)
5 Drawing on your investments background, what do you think would happen to the benefits from diversification when assets markets cointegrate?
4 Do you suspect that globalization and financial integration would ensure cointegration among financial markets?
3 Although there is a similarity between tests for cointegration and tests for unit roots, they are not identical. Explain why.
2 Logically, a relationship can be interpreted only as defining an economic equilibrium if the variables cointegrate, and if they don’t, then there is no interpretable relationship between them. Do
1 If the correlation coefficient between tow asset portfolios is +1, would you invest in both or not? What if it was −1? Explain using finance theory.
(c) Identify the speed of adjustment coefficients and discuss.
(b) Identify the (algebraic) cointegrating relationship.
(a) Express the system as a bivariate vector error-correction model and interpret the error-correction terms.
9 Assume that you have the following estimated system of two variables, x1t and x2t:Δx1t = 0.546 − 0.859 (x1t − x2t) + u1tΔx2t = 0.135 + 0.005 (x1t − x2t) + u2t
(b) Define algebraically the long-run solution and the error-correction term.
(a) Explain the notion of economic equilibrium and state whether it is plausible or not.
8 When two variables cointegrate, we can define X*1t = μ + 2X2t, and refer to X*1t as the equilibrium value of X1t, and ut = X1t − X*1t as the deviation from equilibrium.
7 Discuss the advantages and disadvantages between the Engle–Granger and Johansen cointegration methodologies. Which, in your view, represents the superior approach, and why?
6 Discuss the concept of cointegration for the spot and futures prices of a commodity relying on economic/finance theory. Then, explain how (and why) a researcher might test for cointegration between
5 Why is it necessary to test for nonstationarity in time series data before attempting to build and estimate a model?
4 What do tests for unit roots and cointegration infer about the variables?
3 Where is the variance-covariance matrix used? Provide some examples.
Explain the values that ϕ might take and explain each one of them from the economics point of view.
2 Consider the following model.yt = μ + ϕyt−1 + ut
(c) What is the best estimate of the next period’s price? Explain why.
(b) What could be the odds of an increase and decrease in price?
(a) Explain what this model implies about pt+1 and name that model.
1 Consider the following price process given by the series pt. The dynamics of the process are given by pt = pt−1 + et or, equivalently, by Δpt = et.
5 If a time series’ autocorrelations are nonsignificant, what would that imply about the series?
4 Would you be surprised if AIC and BIC suggested different models?
3 If you plotted the correlogram for a stock’s returns for up to 24 lags and observed a couple of marginally significant one at lags 12 and 18, what would you make of them?
2 If you were to examine a non-seasonally adjusted series, what would ACF and PCAF look like?
1 If we sought to find a model that fits the data very well by including more AR or MA terms (in an ARMA model), would we still find that model?
● Produce forecasts for univariate models
● Apply various information criteria to select among models
● How to build univariate models
● Interpret the series’ autocorrelation and partial autocorrelation functions
● Construct autoregressive, moving average and combined models
● Make a series stationary for further investigation
● Understand various models describing a time series
3 We discuss EMH in depth in subsequent chapters.
2 The simple returns, Rt, are then iid lognormal random variables with mean given by E(Rt) = exp{μ + σ2/2} − 1 and variance by Var(Rt) = exp(2μ + σ2) {(exp(σ2) − 1}.
1 It is also important to state that prices are also useful in financial analysis, espe�cially in applications of technical analysis (which looks at the price movement of a stock and uses this
5 Do you think that skewness and kurtosis values of an asset’s returns would change if we computed them during contractionary periods relative to expansionary periods?
4 If a stock’s return in the auto industry is found to have a Hurst exponent value of less than 0.5, would you expect another company’s (in the tech industry, for example) stock’s returns to
3 If the returns of a financial series exhibit volatility clustering, what can you say about the validity of the identically and independently distributed (iid) property?
2 If you plotted the S&P 500 closing prices and the returns, would you still see the leverage effect?
1 What would happen to the distribution of continuously compounded returns of a stock if we plotted monthly or quarterly data?
9 Observe the following graph (pertaining to the Advanced Micro Devices, AMD, company’s weekly stock returns. What patterns do you see? Discuss in terms of some descriptive statistics and other
8 Using the data in problem 7, annualize the quarterly returns of asset X.
5 What is volatility, and what are the types of volatility?
4 What is autocorrelation, and what are its consequences for an asset portfolio?
3 Why do investors prefer that their financial investments have positive skewness than negative skewness? What are the implications of negative skewness on the asset’s risk?
2 What do the relationships among the mean, mode and median of a financial series tell about the shape of the underlying probability distribution?
1 What are the differences between financial data and macroeconomic data?
● The plan of your paper
● Briefly, the research process
● The relevance of the term paper topic
● What questions will be answered in the paper
● The purpose of your paper
● A brief explanation of the problem
6 Learn of some finance journals and data sources
5 Summarizing the study and offering recommendations for future research
4 Conducting the empirical analysis and interpreting the results
3 Using a methodology and collecting data
2 Doing a thorough literature review
1 Selecting a topic
● Plan of the book
● Financial economics and econometrics and other disciplines
● What are quantitative finance and financial engineering?
● What is financial econometrics?
● What is financial economics?
In Example 16.14, we described an ordinal probit model for postsecondary education choice, and estimated a simple model in which the choice depended simply on the student's GRADES. Expand the ordered
In Example 16.15, we considered a count data model for the number of doctor visits by an individual as a function of a few explanatory variables. In this exercise, we expand the analysis using a
The data file ozconfn contains quarterly data on Australian real consumption expenditure (CONS) and real net national disposable income (INC) from 1975Q1 to 2010Q4.a. Create the series \(L C O N

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