October 25, 2017 UCIM. MSe Economic Analysis. Baonometrics I, 2017/18. Econometrics I - MIDTERM EXAM SOLUTIONS ‘Answer cach question in separate sheets in three hours 1. Let X bea random variable on (0, F,P) whose ef. Fx has a Lebesgue pdf. and Fx (c) > 0, there © is a fzed constant. Let Y= max {X,e} (©) Gheck that ¥ is a random variable and find its ef. Fy. ¥ = max{X,¢}, 50 that ¥-! ((—co,y)) = X-4 ((-ooyy)) € F ify B € because X is a 1.¥. and Y-" ((-00,y)) = @ € F ify 0. (b) Find the p.d.f. of Py, the probability measure corresponding to Fy, wrt. to some measure and use it to caleulate Py ((—c0,2}) for any 2 € R. For m Lebesgue measure and é- the point mass measure at c, Py << m+ Se, and 0 ye so that [ig bt Al +5) = Py (Coon) = Fr) far any YER because for y 6, fang todaims sao = (a Le fe 1) Oden 4909 - Or Fe(O+ [frame = Fx (¢) + (Fx (uy) - Fx (0) = Fx (v) = Fy ((-co,9)) = Fr (y)- Escaneado con CamScanner Scanned with CamScannerUCRM. MSe Economic Analysis. Econometrics I, 2017/18 Octaber 25, 2017 (©) Use the pdf. of (0) to calculate EY. BY] = [thr Waim+én = ( i, if ie) thy (a(n +5.) = [jseoamssyons fr onaim+ so = I. gH Oda+ fe) the (dm) (0) cFx (2) + B[X-1yx>q] = Fx (+ B[X1X > (1 - Fe (€)- (a) Bonus question: Relate your answer to question (¢) to E[X|X > q] @ B[X A¢x>e)] /PIX> 4 Check that this definition of E[X|X > ¢] con be interpreta as the value of the conditional expectation B[X|o(Ae)] () for w € Ae # {ws X (w) > ¢} Note that o(4,) = o(A2) = {4e,Af 9,0} and therefore we can set E[XIX <¢ = B[X-1xca] /PIX Sd = B[Xlo (AD (0) = BX 2 (Ae) (s) fore © A (ur: X(w) < ch so that PO teal, cy LE eas gto E [Xe (Ale) PSS PIX lpecal Ellexsey) E[X-lex>e)] 77 as (w) La, (w) + and E[X-1p05q] E[X-1yx<0)] [sioner = f Brel, wars fA esala er E[X-1xoa] = OS Jar +0 = FL two) pies g PIX>d - B[X tal =f xa and similarly [slxto ar =f xap las Ins and therefore [ptxtetonar = [ xar, Bea(A). This is equivalent to set E[X|X > q = E[X| ><) = 1] , conditioning on a fixed value of the indicator rv. since @ (Iyx5) = 0 (Ae) a8 well, 2 Let X1,Xo,... be independent random variables with 1 with probability X= 0 with probability 1 =1 with probability 3 Yi = Xr and for m> 2, Yn = Xm if Yat = 0; Yu = Yau [Xn if Yat #0. a Escaneado con CamScanner Scanned with CamScannerOctober 25, 2017 UCM. MSe Economic Analysis. Econometrics 1, 2017/18 (a) Show that {¥q}np1 #8 a martingale with respect to Fy =o (Ya Yay-+-s¥n)- Forn>2 BV) Fos) = E (Kal Yat = 0} Fea) +B (a¥a Weal Yat # Ol Fa) )} E(Xn| Fat) + AY ama {¥n-a #0} E(1Xal |Fa-1) } E (Xp) + Yn {¥n-1 # 0} E (|Xnl) = 0-4 nYpaal {¥uu1 #0) 2 = Yat (Ynt #0} = Yoni 8s. where E(|Xal |Fa-1) = B(|Xnl) by independence of Xp and Fr (8) Show that lity so0P Yo = Which type of convergence doest it show? ‘This is convergence in probability, Yu tp 0: P(%q=0)=P(Xq=0)= 1-291, so that P(|¥q| > €) 0 for any € > 0. (©) Bvaluate E(|¥ql). Does {Ya}aox converge to zero in Lx? No, because E (|Yn|) + 00, as n + 00, E(\¥al) = E(E(\¥all Fn) 0}) B(Kal) +B (Waal 1 {¥a-1 #0} B (Xa) ) 4 4 aE anal Yana #0)) 2 = P(X = 2+ 5 (Mea) = 04a) d+ e0nan n-21 = FFE) Al 41> FD te mn, because E (|¥o|) = P (|X1]=0) 3 + B(|%il) = B (|X) = 1. (8) Bonus question: argue that {Ym}qoy does not converge to zero almost surely. For any (small) ¢ > 0, P (Ya > €) = P (Ya £0) = 3, 90 that 0%, P (\¥q| > €) + 00 and ‘we can not apply Borel-Cantelli Lemma (nor the result on convergence of martingales when ‘supnE (|¥n|) < 00.) ¢ that Xq i distributed as Binomial (n,p). Then Xn/n (which is the marimum likelihood ¢ of PE (0,1) eatisfies Vii (Xn/n— p) 4 N (0,p(1 — p)) ) Find the asymptotic distribution of 9(X,,/n) ~ 9 (p) where g(x) = min {2,1—z}. Escaneado con CamScanner Scanned with CamScannerUCIM. MSc Foonomic Economic Analysis, Econometrics T, 2017/18 October 25,2017 Tet Yu = Vit (9(Xn/n) ~ en, for 1 large enough s0 =%= PRO oreo ae , for y R, and n large enough so that ¥/ = % Fv) = PW sw) P (min {Xq/m,1—Xn/n} < y/VA + 9(P)) P (amin {Xq/n,1 —Xq/n} $v) 1 = P (win {Xq/n,1 —Xq/n} >) 1=P({Xn/n > ¥}N{Xn/n <1—¥')) = 1-Ply 0.5, so that 9(p) = 1—p, Em Fay) = 1-80-v)+8U-o0), = 1-8(-y)+0=1-(1-6()) = 4), ‘and therefore we conclude that for p # 0.5, Vi(9(Xn/n) — 9 (P)) rp N (0,7 (1 - P))- You can also argue that, for eg. p < 0.5, P(Xn/n 2 0.5) -+ 0, 0 that 9(Xn/n) behaves as X,,/n, which is asymptotically normal, and use the opposite argument for p> 0.5. If p=05, so that 9(p) = 1 — 9(p) =p = 1~ p= 0.5 we have Yq = Vit(g(Xn/n) ~ 9(P)) S 0, a.s, and therefore litny-sao Fy, (y) = 1 for y 2 0 and for y <0, it holds that yf <1—y/ and we can use the previous derivation to show Jim Fy (0) = 1- 80-1) +8040) = 1-(1-9(y)) +9) = 20), “which shows that the two sides of the distribution of Y/fi(Xw ~ p) around 0 are folded to the left tail so that Yara —|2Z|, where Z~ N(0,p(1~p))- Find the anympotedtbution of sia-* (RTA). Hint: (2) sa) = /VT=. “poping the dan rule we ao have for > 0 wi? 1 (0/00) sin“ (w'7) = om (CS) --awe 5 Escaneado con CamScanner Scanned with CamScannerOctober 25, 2017 UCIM. MSc Economic Analysis. Boonometrics 1, 2017/18 and therefore for g(2) = sin (ul), (8/0u)9(9) = ~1/2V/PT=B #1 P € (012) applying the delta method, alae" (VIR) ant) + av (0(-3/2ve0=R) 201-2) Escaneado con CamScanner Scanned with CamScannerUCSM, Department of Economics ECONOMETRICS I Midterm Exam (Solutions), October 22nd, 2018, 9:00-11:00 AM 2hov 1, Let ¥, X and ¢ be random variables eatiefying Yam(x+e, where X and ¢ are independent with Ble (0) Show that m(z) isthe regression function BIY|X = 2]. (B) Assuming that © has a Lebesgue density fe, show that ¥ has a Lebesgue density given by Sr) f td -m(e)aF). ‘SOL: (a) From linearity of expectations, independence, and the sero mean property BIVIX] = Bln(X)1x]+ BlelX = 2] = m(X)+Ele) = m(X). (®) By the independence Fo) = BUY 0p) (a) Show that Q* ie « measure () Show that Q* <« P (Q* is absolutely continuous wrt P). (©) Show that if Q4(A) = Q(AN {p= 0}), then Q(A) = Q"(A) +Q4(A) (this is called the Lebesgue decomposition of @ wrt P). (@) Show that the Radon-Nikodym derivative dQ*/4P = 4/p. ‘SOL: (a) It is clear that (i) 0 < Q*(A) < 00 and (ii) Q*( countable disjoint sets Ay QA) = QURAN > 0) = QUE: (Ai fp > 0})) (because (Asn {p> 0}) are disjoint) = Yacanw>oy 0. For = QO {p> 0H) = = Ley. (0) 1 P(A) = 0, then p = 0 almost all 2 € A. Thus, Q*(A) = = QW) =0. (0 Since p20, (o> 0) and (9-0) wen pation of rand hence 1A = BO = (0) QA) = QAM > 0) + QANIP=0}). 1 Escaneado con CamScanner Scanned with CamScanner(@) Note y= 4, = fogsn” hoon her the lst equality wes that P((p = 0}) = 0 8 Bconomi theory suggest the relation where Ress is the gross interest rate, 8 is the discount factor, is relative risk aversion parameter, and Fis the o-field generated by the agent's information at time t, Define risi = log(Re+s), r= —log() and dCi+1 = log(Cr+1) — log(C) is consumption growth. () Assuming that dC, is conditionally (on F) normal with mean Fy [dCi¢3] and variance o} and function of a normal distribution show that +B [4C¢3] — 7702/2. w (b) Assuming also that the conditional variance ¢? is constant, say 0, show that E(dCisseu4s] #0 raps d+ dCi teen, ® where you can use that er¢1 = (Be [dC] ~ dCeen)- SOL: (a) Assuming that dC.41 is conditionally normal with mean Ey dCi43] and variance o? and using properties from a normal distribution (for a normal random variable Z with mean j: and variance @? Elem(Z)] = ex 02/2)) +. [oS Ge] By Berm (rca = Bexp (~rEs [dCe4s] +7707 /2) - ‘Thos taking logs log Rey1 = — log (Bexp (~7Es [dCr41] + 7702/2) , = rigs = ot YB (dCv4s] ~ 7709/2 (©) Note ElaCayreery] = BlCEChy1 ~ Bel ACeel) ves} + BB [dCuas] eva) = ~rB [(4Ci41 Be facessI)?] +0 #0. ‘The term E(B: [4Cs41) 443] = 0 because e441 is a prediction error (orthogonal to any variable at time t and By [4C,,,] is a time ¢ variable). 4. Let (1, Yin (Xns Ya) be iid bivariate random vectors with Got second order moments, Let Da Ya x = BX) wy = BD, 0 = Var(%), of = Var(%), in = ti Xia Po oxy = Cou). (2) Show that Xq/P converges in probability to px, provided py #0. (&) Find the axymptotie distribution of J (Rn/Pa ~ x /dr) if py # O- SOL: (a) It follows from the WLLN and the CMT (check the conditions for them to hold). (b) By ‘simple application of the delta method (see Shao"s slides), vit . = Escaneado con CamScanner Scanned with CamScannerMidterm - Econometrics I Miguel Angel Cabello November 8, 2019 Ex. 1 A researcher wants to study the effect of income Z on savings Y through the relation Y=/o+u. However, rather than income the researcher observes a noisy measure X of income such that X=Zte, where (Z,u,£) are independent with ¢ and u following standard normals. ‘The researcher observes an iid sample of (Y, X). (a) Show that the characteristic function of Z can be obtained from that of X and ¢ in a closed form, so its distribution is identified. In particular, explain how ‘you would identify the first two moments of Z. (10 points) (b) Compute the slope of the best lineor predictor of Y given X, say 7, and show the researcher would underestimate the propensity to save if she runs a least squares regression of ¥ on X, that is 7 < 8. (10 points) (6) Show that 6 = E[XY]/(ELC] — 1). (5 points) (d) Define the sample analogue Escaneado con CamScanner Scanned with CamScannerSolution: i (a) Use definition of characteristic function: éxtt) = [e"*] Ee] = E [eit x eM] = da(t)oe(t) x(t) = phe a ent) = 20 ‘We want to identify E[Z] and E[Z*] (Z is unobservable). But, note that: ejz) — 2020) _ [ext _ ox( yy) = iB[X]-iE le] > ElZ] = EIX] iwi 5 = [S erie] = sBT-H8Ed and ay (OKC) (9x yy Oxlt) car yr OX() gn B= A (ane Bye” * one). = [EL] sea Ee*))] then E{Z3] = E[X?] — 1. (b) (Populational OLS) Let L{Y | X] = 7X (best linear prediction of Y given X). Then, ~y solves y= argminE [(¥ — 7X)"] where P a compact set in R. After solving the populational problem, we have: E[XY] 17 EPA] Now, lets see if + is equal to B. _E[XY] _ E[X(6Z +4) 7 EE SERA] _BEIXZ] _ BEIX(X~«)] © TEX? ELX?] DEN Eig Biz (2)+1~ "E47 suming B > 0 (7 underestimate Escaneado con CamScanner Scanned with CamScannerde / (c) From (b): Biz). BIXY] aa ED ‘Thus since E{X?] = E[Z"] +1, then (@) Let define Si, = 10%, Xi¥; and Sp, = 430% XP. By LLN we know: Sin > E[XY] = El(Z + €)(82 + ae = BE[Z) and Say 2 E[X?] = E[(Z + €)'] = E[Z74] +1 Now, the joint distribution will be (assuming E[Z‘] < 00): Sin E[XY] r, va( (sy) - [evel] ome XY) Var(XY) Cov(XY, X?) where V = Ver (Re ‘]) = [coun ay Var X2) |: and Ver(XY) = E[X?¥4] — (E[XY])? = El(Z? + 2Ze + €?)(672? + 28Zu + w)) — (E[XY])? =P EZ] +ElZ"| + E[Z2] +1 — 6(E[Z7))? = 6°Var(Z?) + (6? + 1) E[Z7] +1 rat(Z? + 2Ze + 6%) = Var(Z? + w),Vi,2)| Xe = 2] = f 9(y.¥.z)Jvix—(v)dv 1wv20)-y Sac ee Hestelee =| [Uv > 0) — yd [oe29-1wsmr= [aru Escaneado con CamScanner Scanned with CamScanner(6) It is sufficient that Elg?(¥i Vi Xi)] < 00, this is equivalent to ome cluded Fx ib : f EO) Fr ycelv)dvdFx (2) = f 5 ih Toaone™ (v)dedFx(2) Tax F ss rae dud Fez) <0 : Lf jaa Ex. 3 For any cdf F, define the quantile function F-"(y) = inf{t eR: F(t) > u}, uv € (0,1). (a) Prove that F-1 is non-decreasing. (5 points) (b) Using properties of edfs show that for each ¢ and any random variable (r-v.) U, the following two events are equivalent (5 points): {FU) <= (Us FO}. @) (©) Use the previous result to show that if U is a r.v. with uniform distribution on (0,1), then F-!(U) is distributed as F (even when F is discontinuous). (5 points) (@) Show thet for any rv. X with a continuous and strictly increasing cdf F we can find a uniformly distributed r.v. U such that X = F-(U) with probability one. (5 points) (Bonus § points) if this result is shown for any cdf, not necessarily continuous and strictly increasing). Solution: : feu, Z ius, then Fu) > F-"(ua). Hence, take 1 > u, > (uy) < F7 (ua). Then, since F is not-decreasing, F(F"(ui)) S F(F*(u2) quantile, F(F-"(u)) = w, thus Escaneado con CamScanner Scanned with CamScannersidod sill A searid / od b) Si oS (b) = Us is any random variable (with support in (0,1), start by the event (U) < t}. Given the monotonicity of F, we have: : US FEU) s FSU S FO thus {F7(U) < t} + {U s F()} this means {F-'(U) < th C {US FIO} Now, start by the event {U < F(¢)}, then by monotonicity of F-* PU) s F(F(O) by definition of F~Y, then: FM) St thus {US FW} {FU St this means (US FO} CLF) <4 so {PF W) Sh = {US POY (c) Start by definition of cumulative distribution and call ¥ = F-1(U), then: Fyly) =P Sy) = PFU) Sv) = PU S Fl) = FY) (a) Define U = F(X), then notice: Fol) = PU E1) = PF(X) £0 = P(X SF") = FUP) = thus, U is uniform in [0,1]. Since F is continuous and strictly increasing, inverse function is well defined in [0, 1], then there exists ¢ s.t. F(t) = u for any u € [0,1]. Now, we can define Z = F~(U). From previous exercise -P(Z < t) = Fe(t) = Fl) = P(X $ 8) for any ¢€ [0,1]. So Z is distributed as Escaneado con CamScanner Scanned with CamScannermetrics, and Ex. 4 ular model in financial econo! : It is ‘The GARCH(1,1) model is the most pop' -econom it is used, = Bas, in modeling market risk by finencial institutions: defined as -dfen - 2 Yeon of = yt aoYer + Por» teZ, godic random variables satisfying (3) where ¢; is a sequence of strictly stationary and er Bec Fiea] = 0 and E [e3] Fa] = 1 almost surely (2-5), Ya. and twp > 0, a9 > 0,1 > lp > 0. Here Fi is the o-field generated by (Yi-1, (a) Prove the following preliminary result: If 32, E(1Xi-s[] < 00, then the series DZ, Xe-g converges absolutely almost surely (§ points), i. # (Spx <=) =1 in (b) Assuming Yi. is stationary with E{¥2] < 00, show that of € Fi-1 and prove that {¥;} is a martingale difference sequence with respect to F,1. (5 points) (c) Compute the conditional variance of ¥; given F,1. (5 points) _@ Is ¥i.a Markov process? Explain (5 points) Solution: | (a) Define Z-= S72, 1X14] and the sequence Z, = Z1((Z $ ¢}). then note that 24 Zast+oo itis given that E[Z|'< oo and 2 < Z. Thus: Elz) =E1Z] + E1Z1(2 > 0) i Escaneado con CamScanner Scanned with CamScannervm | Carlos)” de Maj which may be true iff lim Z[1({Z > 1})] =0 thus (b) Using recursive substitutions = up took? + hoody = Up tap¥its + Alto + a0¥i22 + Foo7_2) = seats, ja where the series is well defined by part (a). It follows that o € Fs. Then EYIFAa] = © [YF] 0 Elo Fe] Bled Fs] Oas. Botell 7.) oF [e3| Fa] a Scanned with CamScanner