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Final Exam Tiago Silva Vieira

Use draft paper to plan your answers before writing them on the exam paper.

Unless otherwise stated, use 5% for significance level.

Name: number:

What (three) characteristics of the model can contribute to a low sampling variance

of the OLS estimator of a particular coefficient?

hold, suppose you estimate the parameters by OLS. How would you predict the

expected value of the dependent variable, given particular values of the regres-

sors? How would you construct a prediction interval for that expected value of the

dependent variable?

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3. Explain intuitively why weighted least squares estimators (WLS) have a smaller

variance than the typical OLS estimators, in a model for cross-sectional data where

the homoskedasticity assumption fails.

4. Consider a multiple linear regression model for cross-sectional data that analyses the

impact of trade barriers on national income of countries around the world. Among

other regressors, you include dummies for Africa, Europe and Asia (that equal one

if the country is, respectively, in Africa, Europe and Asia and zero otherwise). Also,

you include a constant in the model. What conditions must you impose in your

sample so that the Absence of Multicollinearity assumption is not violated (due to

the inclusion of the dummies) in the model?

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6. "As it happens with cross-sectional data, we can always assume random sampling

in time series analysis". Is this statement true? Explain.

7. What can go wrong in a regression model if the errors follow an AR(1) process?

What can you do to solve the problem, and under what conditions can you do it?

If you can’t solve the problem, how can you conduct valid inference?

yt = β 0 + β 1 xt1 + β 2 xt2 + ... + β k xtk + ut

where the error term follows an AR(2) process,( ut = ρ1 ut−1 + ρ2 ut−2 + et and et is

independent of the regressors) but all the other assumptions needed to guarantee

unbiasedness of the OLS estimator and the validity of "typical" OLS inference are

verified. How would you transform the model so that estimation by OLS of the

transformed model is equivalent to GLS estimation of the original model for t > 2

(don’t worry about the first 2 observations)?

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hold in a time series regression model that includes a linear trend as a regressor.

What are the effects (in terms of bias on the estimators of the remaining regressors)

of leaving the linear trend out of the model? Under what conditions is the bias

inexistent or negligible? (answer the question in light of the analysis of omitted

variable bias)

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Name: number:

Group II (8 points)

1. You have been commissioned to perform a study about the impact of the BSE crises

on the beef price in Portugal. You have annual data for the years 1970 through

2007 on the following variables:

keypricet - Average beef price in Germany, the reference beef price in the EU

(euro/100kg);

SSRt - Portuguese self-sufficiency ratio (Production / Domestic use);

BSEt - Dummy variable, it is 1 from 1996 on.

estimates):

(35.22) (0.50) (14.98) (10.35)

(a) Interpret each of the coefficient estimates β̂ 1 , β̂ 2 and β̂ 3 . Do they have the

expected signs? (0,5 points)

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Name: number:

(b) Test if there is a shift in the beef price after the BSE crises at a 5% significant

level. State the null and alternative hypotheses and show how you calculate

the required test statistic. State the decision rule you use, and the inference

you would draw from the test.(0,5 points)

your errors suffer from serial correlation. You decide to use the Durbin-Watson

statistic (DW).

(c) The DW statistic from your regression is DW = 0.55. What can you conclude

in terms of serial correlation? (1 point)

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(d) Imagine your model had the variable pricet−1 as an explanatory variable. Does

it change your conclusions from the DW statistic? Why? (1 point)

When discussing your results with your research assistant, he reminds you

about the importance of including a trend in your model. After including it

in your model, the only variable that is statistically significant is the trend.

(e) What can be happening in your initial model? Does it affect your conclusions

about the impact of BSE on prices? (1 point)

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2. Consider the following model, where wage is the salary of a CEO, educ is the

number of years of education and exper is the number of years of experience.

(a) What is the percentage change in wage, on average, given a caeteris paribus

unit increase in exper ? Express your answer in terms of the equation parame-

ters. (0,5 points)

Using a random sample of 523 individuals, the following results were obtained:

8

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(b) Is the quadratic term significant at 1% level? Formalise your answer, stating

the null and alternative hypotheses and show how you calculate the required

test statistic. State the decision rule you use, and the inference you draw from

the test. (0,5 points)

(c) Forecast the average wage of a CEO with 16 years of education and 10 years

of experience. Explain how you would proceed to obtain a standard error for

your forecast based on a confidence interval of 95%. (1 point)

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Additionally, the following output was obtained, using the residuals from the

model estimation:

your answer, stating null hypothesis, test statistic and decision. (1 point)

(e) How does your answer in question (2d) interfere with your answer in questions

(2b) and (2c)? Explain using no more than 5 lines of text. (1 point)

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where ut follows an MA(2) process, that is, ut = et + ρ1 et−1 + ρ2 et−2 where {et } is

an i.i.d. sequence with mean 0 and variance σ 2e , uncorrelated with the regressors.

(a) What assumption for time series models is necessarily violated in this model?

(0,5 points)

(b) What is the mean and variance of ut (Look only at the unconditional mean

and variance, E[ut ]and V ar[ut ])? (0,5 points)

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for all integers k ≥ 1.(if you did not answer to part b), it is enough to derive

Cov(ut , ut−k ) for all integers k ≥ 1). (1 point)

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(d) Suppose now that ut = et + ρ1 et−1 + ρ12 et−12 where {et } is an i.i.d. sequence

with mean 0 and variance σ 2e .Derive the autocorrelation function of the process

{ut } for all integers k ≥ 1.(if you did not answer to part b), it is enough to

derive Cov(ut , ut−k ) for all integers k ≥ 1). (1 point)

13

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