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MSc Money, Banking and Finance 2011/2012

Econ 403 – Applied Econometrics 2 hrs 30 minutes

Answer ALL questions from Section A (60 marks), ONE question from Section B (20 marks), and ONE question from Section C (20 marks).

Please use a separate answer book for each section.


Question 1 (24 marks) Assess whether each of the statements below is TRUE or FALSE. Marks will be awarded only for the explanation provided. a) When a relevant variable is omitted from a multiple linear regression the OLS estimates are always biased. (4 marks) b) Absence of correlation does not mean independence. (4 marks) c) The ACF never converges if the series is non-stationary. (4 marks) d) OLS estimates of a non-stationary model are super consistent. (4 marks) e) The can be used to determine the goodness of fit in a GARCH framework. (4 marks) f) The null hypothesis for the Durbin-Watson and co-integration Durbin-Watson are similar. (4 marks)

Question 2 (36 marks)
a) Explain the role of intercept and slope dummy variables in linear regression models by using an example. Use diagrams to illustrate where appropriate. (12 marks)

b) Explain the difference between parametric and non-parametric measures of volatility. Give an example for each. (12 marks)

c) Outline the Hausman test and provide suggestions as to which model is to be used (random or fixed effect model) in the case that we accept / reject the null of no correlation between the individual specific effects and the explanatory variables. (12 marks)…...

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