ECON20110/30370 Econometrics

Semester 2 - Mid-Term Test - Feedback

Read this together with the information which answer you gave from the results spreadsheet.

1. This question tests your understanding with respect to spurious regressions. (Lecture
Notes 4.2 and online clip)
(a) Trending data are a problem. The fact that they trend in opposing directions does
not help.
(b) You said that we are likely to find a positive coefficient, but the opposing trends will
deliver a negative coefficient.
(c) You said that we would find a negative coefficient (correct!) with a small (absolute)
t-value (incorrect). If we regress two trending series on each other we are likely to
get very large (absolute) t-tests.
(d) Trending data are a problem. The fact that they trend in opposing directions does
not help to find a LLN and a CLT. Many students gave this answer.
(e) correct answer
2. This question asks you to calculate the conditional expectation of an AR (2) process.
While it is an AR(2) process, basic expectation calculations deliver the result analogous
to the AR(1) case (Lecture Notes Univariate TS process, Tutorial 2). Most students got
this question right.
(a) Correct answer
(b) You calculated the unconditional expectation for an AR (1) process.
(c) You calculated the unconditional expectation for an AR (2) process.
(d) You did not include b0 into your calculation.
(e) You did not take into account the b2 yt2 term.
3. This question asks to calculate the conditional expectation of an AR (2) process - two
steps ahead. (Lecture Notes: Univariate TS process, Tutorial 2). Most students got this
question right.
(a) The conditional expectation is not equal to the second last observation.
(b) You calculated the unconditional expectation for an AR (1) process.
(c) Correct answer
(d) You did not include b0 into your calculation.
1

(e) You did not take into account the b2 yt2 term.
4. This question tests whether you understand the implication of AR(1) model parameters on
the autocorrelation function predicted by that model. (Lecture notes: Section Univariate
time-series models, Wooldridge p 383-384, and 2nd tutorial).
(a) you assumed that the correlation function remains constant, but if the AR(1) coefficient is smaller than 1 it will decline towards 0.
(b) you assumed that the correlation function converges to the estimated AR(1) coefficient. But if the AR(1) coefficient is smaller than 1 it will decline towards 0, starting
from the value of the estimated AR(1) coefficient.
(c) you started with the correct 1 but then stated that the autocorrelation function is
increasing when it is really decreasing
(d) you correctly assumed that this model implied a declining correlation function, but
another autocorrelation function has a better fit. Many students gave this answer.
(e) correct answer
5. This question asks you to use regression estimation results to produce a conditional forecast
(Lecture notes Week 2).
(a) You just added all estimated constant. This indicates that you did not understand
this topic.
(b) You just chose the regression constant as the conditional forecast. This indicates
that you have not revised this area.
(c) correct answer
(d) You produced the correct conditional forecast but then added the regression standard
error.
(e) You calculated the expected value for Jimmy.
6. This question tests your knowledge on using regression models for prediction. In particular
whether you understand the qualitative difference between a confidance interval for an
individual and an average. It asks for the correct statement. (Lecture Notes Week 2,
Wooldridge chp 6.4). The question was generally well answered.
(a) correct answer.
(b) Standard errors and therefore confidence intervals for an individuals prediction are
wider than those for averages, as uncertainty is averaged out when predicting averages.
2

(c) The point forecast for an individual with a set of characteristics equals that for an
average of a group of individuals all of which display the same characteristics.
(d) It is easy to calculate prediction standard errors in a regression in which the conditioning values are subtracted from the explanatory variables.
(e) Incorrect, the extreme individual behaviour amongst a group of individuals tends to
average out.
7. This question tests your knowledge on regression models with time-series data and why
we need a new set of assumptions. (Lecture Notes Week 3, Wooldridge chp 11)
(a) For strongly dependent data we cannot estabish the necessary LLN and CLTs.
(b) Weakly dependent data do not indicate that the data are independent. Weak dependence is still dependence.
(c) Asymptotic normality for OLS parameters can be established for a combination of
dependence and moment restrictions. In general, the stronger the dependence assumption (i.i.d being the strongest) the weaker can be the moment restrictions.
(d) If the time-series used in a linear regresison model display dependence we can establish the asymptotic distribution of the OLS parameter estimators if the degree of
dependence is limited (to weak dependence). Many students thought that this was
not possible.
(e) correct answer.
8. This question asks for the calculation of a F-test statistic and a conclusion regarding the
null hypothesis. (Reading: Lecture Notes Week 1 and 2.,W.4.5, 5.2 8.2, W. Problems 4.6,
4.9)
(a) Incorrect, the test statistic is larger than the critical value.
(b) You claimed that we cannot perform inference as the error terms were not normally
distributed. This is incorrect, as long as the GM assumptions hold and the sample
size is big enough you can perform t and F tests.
(c) Correct
(d) You used SSRr rather than (SSRr SSRu ) in the calculation of the test statistics
numerator.
(e) Incorrect, you can calculate the test stat and get the relevant critical table from the
statistical tables.
9. This question tests whether you understand the structure of an F-test statistic. Most
students got this right.
3

(a) Correct answer

(b) Incorrect. You need to use the F-stat and solve for the numerator degrees of freedom
(c) Incorrect. You need to use the F-stat and solve for the numerator degrees of freedom
(d) Incorrect. You need to use the F-stat and solve for the numerator degrees of freedom
(e) Incorrect, there is enough info. You need to use the F-stat and solve for the numerator
degrees of freedom
10. This question refers to the consequences of heteroskedasticity (Lecture notes: Consequences of heteroskedasticity, Wooldridge p 271-272). There were two correct answer
(and hence answer (e) was correct as it claimed that both (b) and (c) were correct. Many
students only picked out one of the correct answers.
(a) If error terms are heteroskedastic OLS parameter estimators are not efficient.
(b) correct answer, but you did not realise that a second answer was also correct
(c) correct answer, but you did not realise that a second answer was also correct
(d) The standard parameter estimator variance formulae are not valid when error terms
are heteroskedastic.
(e) correct answer
11. This question refers to the asymptotic distribution of b when the residuals are heteroskedastic. (Lecture notes 5.2, W. 8.2). Most students got this right.
(a) You merely copied from the lecture notes without adjusting your answer to the regression model in the question.
(b) You merely copied from the lecture notes without adjusting your answer to the regression model in the question.
(c) You stated the distribution which is valid when all Gauss-Markov assumptions are
maintained.
(d) The expected value of b is rather than 0.
(e) Correct answer.
12. This question tests your understanding of the White standard errors. (Lecture notes 5.2,
W. 8.2)
(a) You choose the standard estimator which is only valid if all the Gauss-Markov assumptions are valid.

(b) The error terms were labeld as ei rather than ui and also you didn ot realise that,
to calculate White standard errors, we need the estimated residuals aand not the
unobserved error terms. A significant number of students picked this answer.
(c) You choose the standard estimator which is only valid if all the Gauss-Markov assumptions are valid.
(d) Correct Answer
(e) you said none of the above but there was indeed the correct version of White standard
errors
13. This question tests your understanding of auxiliary regressions in general. The auxiliary
regression in the question used the estimated residuals (and not their squares) as dependent
variable (Lecture Notes Week 1 and week 4). In fact, many of you seemed to have missed
this and therefore picked answers that would have been correct ((b) and (d) and therefore
answer (e) which claimed that both (b) and (d) were correct) if the dependent variable
had been the square of the estimated residual.
(a) correct answer.
(b) Incorrect, the auxiliary regression shown is to test for the relevance of an additional
variable. If we were to test for heteroskedasticity the dependent variable had to be
the squared estimated residual.
(c) Incorrect, the auxiliary regression shown is to test for the relevance of an additional
variable. If we were to test for heteroskedasticity the dependent variable had to be
the squared estimated residual.
(d) No, the additional variable included in this auxiliary regression was stated to be
irrelevant and hence the R2 will be close to 0.
(e) You picked two correct answers, but neither of these was correct
14. This question tests your understanding of auxilliary regressions in general and whether
you can calculate a Breusch-Pagen test statistic in particular. (Lecture Notes 2, 5.3.1,
W.8.3)
(a) You refer to a critical value from the 2 distribution with 2 dof. However, you need
4 degrees of freedom as the aux regression has 4 explanatory variables. Many of you
made this mistake.
(b) You refer to the DW statistic which relates to autocorrelation and not to heteroskedasticity.
(c) You incorrectly calculated the LM statistic. You possibly calculated n RSS when
the correct formula is LM = nR2 .
5

(d) You calculated an incorrect p-value for this test statistic. This could be because you
used an incorrect number of restrictions.
(e) correct answer.
15. This question tests whether you understand how to test the significance of regression parameters and whether you understand when to use White standard errors rather than the
conventional parameter estimator standard errors. It also tests whether you understand in
which situations we can draw inference even in small samples (W, Section 8.2, W. Problem
8.4, 8.5, Lecture Section 1 and 5)
(a) You claim that the small sample size forces us to use the conventional standard errors,
failing to recognise that this will deliver invalid inference when residuals fail to be
homoskedastic.
(b) Correct answer
(c) You claim that for a large sample inference is not possible when residuals are homoskedastic. This is incorrect
(d) This is incorrect as the t-test calculated using the White standard errors is larger
than 1.96.
(e) Wrong, the t-test is clearly smaller than the critical value. You may have calculated
the t-test for the null hypothesis that the coefficient was equal to 0, but this particular
answer referred to hypothesis that the coefficient was equal to 1.
16. This question tests your understanding of auxiliary regressions in general, and auxiliary
regressions to test for ARCH type heteroskedasticity in particular. (Lecture Notes 2, 5.3.3,
W. 12.6)
(a) This answer makes absolutely no sense.
(b) You tried to recover the R2 by solving LM = nR2 , but you used an incorrect n. Recall
that you loose three observations for the auxiliary regression when you include three
lagged terms. Many students made this mistake.
(c) This answer makes absolutely no sense. It is the LM test statistic that needs to be
compared to its critical value.
(d) correct answer
(e) While the p-values is indeed smaller than 0.01 you came to the wrong conclusion.
Revise decision rules with p-values.