2019 Fin Econ
2019 Fin Econ
2019 Fin Econ
INSTRUCTIONS TO CANDIDATES:
ADDITIONAL MATERIALS
Statistical tables
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Question One
c) In each of the models below, show how it is possible to apply ordinary least
squares estimation method.
i. Yt AX t e ut [3]
ii. Yt ut [3]
Xt
Question Two
iii. Write the regression equation that fits the generalisation in (ii) above.
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[2]
b) You have estimated the following ARMA(1,1) model for some time series data
y t = 0.036+0.69y t 1 +0.42u t 1 +u t . Suppose that you have data for time t−1,
i) Obtain forecasts for the series y for times t, t+1, and t+2 using the
estimated ARMA model. [6]
ii) If the actual values for the series turned out to be −0.032, 0.961, 0.203
for t, t+1, t+2, calculate the out-of-sample mean squared error.
[6]
Question Three
i. Determine which, if any, of the acf and pacf coefficients are significant
at the 5% level. [5]
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ii. Use both the Box–Pierce and Ljung–Box statistics to test the joint null
hypothesis that the first five autocorrelation coefficients are jointly zero.
[6]
Question Four
(14.38) (0.2561)
Given that T=22 and using the 5% level of significance, test the hypothesis
that the slope of this function is equal to 1 against a two sided alternative
using both the test of significance and the confidence interval approach. [9]
Question Five
a) With the aid of technical notations, explain the following time series concepts:
e) Suppose that it is now January 1993. Consider the following regression for the
standard CAPM β for the returns on a stock
rgt rMt t
where rgt and rMt are excess returns on Glaxo shares and on a market
1987M11-1992M12:
rgt 0.68 1.53rMt , T=62 and RSS 2 =0.00336
1981M1-1992M12:
r gt 0.39 1.37rMt , T=144 and RSS=0.0434
Test the above conjecture using a Chow test of parameter stability. [7]
Question Six
c) Distinguish between the population and the sample regression function. [3]
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d) Given that the price of an asset follows a Moving Average (MA) process of the
following form: Pr icet 1 t 1 2 t 2 3 t 3 t
e) The following is an output for tests on residuals from testing whether inflation
was indeed a monetary phenomenon in Zimbabwe between 1975 and 2005.
Comment on whether the residuals from this test were normally distributed or
not. [6]
THE END
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