EF3451 Economic and Business Forecasting Homework assignment 1 Due on or before February 24, 2012 (Friday), 5: 30pm

1.

Using 30 annual observations on time series data, a forecaster obtained the following regression using the ordinary least squares method:

ln Yt =1.31 0.27 ln X 1t +0.53 ln X 2t 0.82 ln X 3t

(0.17)
R 2 = 0.615

(0.21)

(0.30)

, DW = 0.496 ,

where figures in brackets below parameter estimates are the corresponding estimated standard errors; Yt= number of business failures; X1t = volume of industrial production; X2t = short term interest rate; X3t = value of new business orders placed. Which of the following statements is true, which is false, and why? (a) The estimated partial regression coefficient on ln X 2t , 0.53, is interpreted as: all else remaining the same, one unit change in the short term interest rate leads to an expected 0.53 increase in business failures. (b) The value of R 2 will decline considerably if X 2t or X 3t is dropped. (c) The equation suffers from spurious regression problem. 2. (Source: Diebold, 2007, p.31, Exercise#2.2) For each of the diagnostic statistics listed here, indicate whether, other things the same, bigger is better, smaller is better, or neither. Explain your reasoning. (Hint: Be careful, think before you answer, and be sure to qualify your answers as appropriate.) (a) t-statistic (b) probability value (p-value) of the t-statistic (c) Standard error of the regression (d) Durbin-Watson statistic 3. (a) If an integrated ARIMA(0,1,0) model is used on the following data, what is the forecast for period t = 6 ? 1 2 3 4 5 6 Xt 10 12 13 15 17 ? (b) If an AR(1) model X t = 4 + 0.8 X t 1 is used on the following data, what is the forecast for t = 6 ? t 1 2 3 4 5 6 Xt 10 12 13 15 17 ? 4. For the AR(1) model
yt = yt 1 + t
t =1,2,..., T ;
2 with | |<1 and t iiN (0, )

Show that by successive substitution yt = t y0 + t 11 + ... + t . 2 2 (b) Show that if y 0 N (0, / 1 ) , then E ( yt ) = 0 for all t and 2 var( yt ) = 2 = /(1 2 ) so that the mean and variance are independent of t. a( yt ) = . If | |>1 then (c) Show that if =1 then v r v r yt ) is negative! a(
(a)