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Question 1
Show that Hansen’s J-statistic converges to the χ2L−K distribution . In standard notation:
x01 z10 y
1
.. .. ..
0 n×K n×L
y t = x t β + εt , X = . ∈ R ,Z = . ∈ R , y = . ∈ Rn ,
xn 0 zn 0 yn
n
1X Z 0ε
gn (b) = zt (yt − x0t b), (⇒ gn (β) = ).
n n
t=1
By model assumptions,
Z 0ε d p
√ → N (0, V ), Ŵ → V.
n
The efficient IV estimator is
X 0 Z Z 0 X −1 X 0 Z Z 0 y p
β̂IV = ( Ŵ ) Ŵ , where Ŵ → V −1 .
n n n n
Prove that
p
ng(β̂IV )Ŵ g(β̂IV ) → χ2(L−K) .
Question 2
Consider data generating process (wt , t = 1, 2, · · · ) which is a parametric model with parameter
β ∈ RK and which satisfies strict stationarity and mixing properties. Suppose E[m(wt , β)] =
0 ∈ RL for some m(·, ·), L ≥ K. So that
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1. Define the nonlinear GMM estimator β̂ given by the moment condition E[m(wt , β)] = 0
and the weighting matrix W and derive the following asymptotic variance matrix of the
efficient non-linear GMM estimator:
d d
( E[ m(wt , b)|β ]0 Σ−1 E[ 0 m(wt , b)|β ] )−1 .
db0 db
Assume the moment conditions mt (wt , β) follows a martingale difference sequence, specify
the optimal weighting matrix Σ−1 that achieves efficiency.
2. Show that the asymptotic variance matrix of the efficient IV (linear GMM) estimator is
a special case of above expression.
Question 3
1. Provide a example of a regression encountered in class that suffers from endogeneity and
propose an instrument. Explain why endogeneity is present and justify that the proposed
instrument is exogenous.
3. Consider the CAPM yt = α+βxt +εt . If, instead of running OLS, xt is being instrumented
by its lagged value xt−k for some k > 0. State the corresponding moment condition and
explain its economic meaning.
4. Suppose the econometrician would like to consider more lagged values xt−k−1 , · · · , xt−k−p
for the instrumented CAPM, how would she test for the joint exogeneity of her instru-
ments?
1
The sample counterpart of hetereoskedasticity robust asymptotic variance matrix for the OLS estimator is
the sandwich estimator.
2
Question 4
2. Define the ARCH(1) model (yt ), with intercept term. Your model should have 3 parameters—
e.g. (µ, α0 , α1 )0 .
4. Provide, and justify, moment conditions that would allow the model to be estimated by
GMM.
5. State appropriate Gaussianity assumptions that would allow the model to be estimated
by MLE and give the expression of log-likelihood function.
Question 5
1. Consider the family {f (w; θ)} of densities indexed by parameter θ from which data w
is drawn. Define the score and prove the Cramer-Rao information inequality:2 For any
R
unbiased estimator g(w), i.e. Eθ [g(w)] = g(w)f (w; θ)dw = θ for all θ,
∂2
Varθ (g) ≥ (−Eθ [ log f (w; θ)])−1 .
∂θ2
2. Show that the OLS estimator β̂ achieves the Cramer-Rao lower bound, under appropriate
Gaussianity assumptions. State precisely the distributional assumptions you make. In
terms of exogeneity for the error term, is it exogenous/strictly exogenous/or...?
3
Question 6
i.i.d.
Consider the Gaussian AR(1) model yt = ρyt−1 + εt , εt ∼ N (0, σ 2 ), |ρ| < 1.
1. Give the expression of the conditional log-likelihood function for sample y1 , · · · , yn , con-
ditional on y1 and the corresponding score.
2. Show the FOC of the (conditional) MLE for this model are also moment conditions that
can be used in a GMM framework.
4. Provide another example of quasi-MLE. Look for the simplest example possible.
Question 7
Consider the static 1-dimensional Kalman filter: the latent state and the observed value are
given by random variables ξ and y = hx + aξ + w respectively, where E[w] = 0, Cov(ξ, w) = 0
and x is deterministic.
aVar(ξ)
ξˆ = E[ξ] + (y − hx − aE[ξ])
a2 Var(ξ)+ Var(w)
aσξ
≡ µξ + (y − hx − aµξ ).
a2 σξ + σw
2. Assume ξ and w are jointly normal. Give the likelihood function f (ξ, y; θ) = f (y|ξ; θ)f (ξ; θ)
of this model, where θ = (a, h, µξ , σξ , σw )0 .
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4. Define the CAPM model where beta follows a random walk. State clearly the latent
state and observation variables. Provide economic or econometric reasons why one might
entertain such a model.
Question 8
3. Show that MLE is always a special case of exactly identified GMM. On the other hand,
provide an example where GMM cannot be replaced by MLE. You may want to search
from the preceding questions.
Question 9
i.i.d.
yt = ρyt−1 + εt , εt ∼ (0, σ 2 ).
2. Assume |ρ| < 1 and (yt ) is strictly stationary, show that E[yt ] = 0 for all t, and
3. Based on part (2), explain why the process (yt ) exhibits mean-reversion by reasoning
along the same line as how the mixing inequality means mixing processes exhibit mean-
reversion.
4. Assume ρ = 1, explain why (yt ) cannot be weakly stationary (therefore a fortiori not
strictly stationary either). Explain why (yt ) is a martingale.
5. Provide an example of a financial time series that may be a unit root process (i.e. ρ = 1).
Provide underlying economic reason(s) why your example may be a unit root process.
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Question 10
i.i.d.
yt = ρyt−1 + εt , εt ∼ (0, σ 2 ).
ρ̂ − ρ d
qT → N (0, 1).
1
σ̂ · PT 2
t=1 yt−1
5. Explain how one can test whether the series you proposed in Question 9 part (6) is indeed
unit root.