Multiple Choice Test Bank Questions No Feedback – Chapters 11-14

Correct answers denoted by an asterisk.

1. Which of these are advantages of using panel data?

(I) We can address a broader range of issues and tackle more complex problems than
would be possible with pure time-series or pure cross-sectional data alone
(II) It allows us to increase the number of degrees of freedom
(III) It allows us to increase the power of the tests
(IV) We can remove the impact of certain forms of omitted variables bias in
regression results.

(a) I only
(b) I and II only
(c) I, II, and III only
(d)* I, II, III, and IV.

2. Which of these is a type of panel estimator approach?

(I) Fixed effects
(II) Random effects
(III) Seemingly unrelated regression effects
(IV) Time-varying effects.

(a) I only
(b)* I and II only
(c) I, II, and III only
(d) I, II, III, and IV.

3. Entity fixed effects models

(a)* Allow the intercept in the regression model to differ cross-sectionally but not
over time, while all of the slope estimates are fixed both cross-sectionally and over
time
(b) Allow the slope in the regression model to differ cross-sectionally but not over
time, while the intercept estimates are fixed both cross-sectionally and over time
(c) Allow the intercept in the regression model to differ over time, while all of the
slope estimates are different both cross-sectionally and over time
(d) Any of the above could be true depending on the model specification.

4. Running a cross-sectional regression on the time-averaged values of the variables is

known as a:
(a) Within estimator
(b)* Between estimator
(c) Cross-sectional estimator
(d) Demeaned estimator.

5. The acronym LSDV in panel model estimation stands for

(a) Least squares dependent variable
(b) Limited squares dependent variable
(c)* Least squares dummy variable
(d) Limiting squares dummy variable.

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 6. Which of the following is a mathematical expression of a time-fixed effects model?
(a) yit    xit  uit
(b) yit    xit  i   it
(c) yit    xit  it , it  i  vit
(d)* yit    xit  t   it .

7. What of the following is a mathematical expression of a random effects model?

(a) yit    xit  uit
(b) yit    xit  i   it
(c)* yit    xit  it , it  i  vit
(d) yit    xit  t   it .

8. To test for unit roots in panel data, Levin, Lin and Chu (2002) develop a test based
on the equation yi ,t i  t   i t  i yi ,t  1   i yi ,t  1  vit . What is the appropriate
null hypothesis for this test?
(a) * H 0 :  i  0
(b) H 0 :  i 0
(c) H 0 :  i 0
(d) . H 0 :  0

9. Logit and probit models are more appropriate than linear probability models
because:
(a) Logit and probit can estimate probabilities that are negative
(b) Logit and probit cannot estimate probabilities that are greater than one
(c) Logit and probit cannot estimate probabilities that are negative but not greater than
one
(d)* Logit and probit cannot estimate probabilities that are negative or greater than
one.

10. Which of the following statements about logit and probit models is true?
(I) They cannot be estimated by ordinary least squares
(II) They can be estimated using maximum likelihood
(III) They can be estimated using non-linear least squares
(IV) They can be estimated using instrumental variables.

(a) I only
(b) I and II only
(c)* I, II, and III only
(d) I, II, III, and IV.

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 11. If the maximised value of the log-likelihood function for a logit model is 34.55
and for a restricted model where all of the slope parameters are set to zero is 30.67,
what is the pseudo-R2?
(a) 0.13
(b)* –0.13
(c) 0.11
(d) –0.11.

12. Appropriate modelling of limited dependent variables that are assigned numerical
values having a natural ordering can be done using:
(I) Probit models
(II) Logit models
(III) Ordered probit models
(IV) Ordered logit models.

(a) I only
(b) I and II only
(c) II and III only
(d)* III and IV only.

13. In the context of an event study, a cumulative abnormal return:

(a) Is calculated by summing the individual returns over all the firms separately for
each day
(b) * Is calculated by summing the individual returns over time for each firm
separately
(c) Takes the geometric product of the individual returns over all the firms separately
for each day
(d) Takes the geometric product of the individual returns over time for each firm
separately.

14. Which of the following statements is TRUE concerning the calendar time
methodology sometimes used in event studies?
(a) It will weight all the firms in the sample that underwent the event equally
(b) It can involve the calculation of a buy-and-hold abnormal return
(c) If the slope parameter in the test regression is positive and significant, this will
provide evidence of an abnormal return in the event study
(d) *It will give more weight in the sample to firms which underwent the event at a
time when few other firms did so.

15. The traditional Fama–MacBeth approach to tests of the CAPM involves:

(a) * A set of time-series regressions to estimate the betas for each stock and then a
cross-sectional regression to estimate the risk premium
(b) A set of cross-sectional regressions to estimate the betas and then a time-series
regression to estimate the risk premium
(c) A single cross-sectional regression to estimate the CAPM beta
(d) A time-series regression to estimate the betas for each stock and then another time-
series regression to estimate the risk premium.

16. In the Fama–MacBeth regressions, the parameter estimates in the second stage are
interpreted as:

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 (a) Factor loadings
(b) * Factor risk premia
(c) Average returns for each stock
(d) The volatilities of returns for each stock.

17. In the Fama–MacBeth regressions, the parameter estimates in the first stage are
interpreted as:
(a) * Factor loadings
(b) Factor risk premia
(c) Average returns for each stock
(d) The volatilities of returns for each stock.

18. In Fama–French (1993)- and Carhart (1994)-type models, for there to be no

evidence of outperformance by a fund manager, we would require:
(a) The intercept is positive but not statistically significant
(b) The intercept is not positive and significant and slope estimates are all
insignificant
(c) * The intercept is not positive and significant
(d) The slope estimates are all insignificant.

19. If we use the block maximum approach to estimating the parameters of a member
of the extreme value family of distributions and we select a large number of short
blocks, which of the following is a likely disadvantage?
(a) * A number of data points would be classified as extreme when they are not,
leading to bias in the shape parameter estimate
(b) Too few data points would be classified as extreme, leading to excessive noise in
the shape parameter estimate
(c) Too few data points would be classified as extreme, leading to bias in the shape
parameter estimate
(d) A number of data points would be classified as extreme when they are not, leading
to excessive noise in the shape parameter estimate.

20. Which of the following distributions would be most appropriate for modelling the
central part of the distribution of a set of stock returns?
(a) Gumbel
(b) Fréchet
(c) Weibull
(d) * Normal.

21. If we use the peaks-over-threshold approach to estimating the parameters of an

extreme value distribution, if we use a value of U, the threshold, that is too high (i.e.,
too far into the tail), which of the following is a likely disadvantage?
(a) A number of data points would be classified as extreme when they are not, leading
to bias in the shape parameter estimate
(b) * Too few data points would be classified as extreme, leading to excessive noise in
the shape parameter estimate
(c) Too few data points would be classified as extreme, leading to bias in the shape
parameter estimate
(d) A number of data points would be classified as extreme when they are not, leading
to excessive noise in the shape parameter estimate.

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