Exam information

ECON7350
Course code and name
Applied Econometrics for Macroeconomics and Finance
Semester Semester 1, 2020
Exam type Online, non-invigilated
Exam date and time Please refer to your personalised timetable
Working time (150 minutes) + additional online allowance (30 minutes) =
Exam duration
TOTAL exam duration: 3 hrs.
You must commence your exam at the time listed in your personalised
Exam window
timetable. The exam will remain open only for the duration of the exam

Reading time has not been formally allocated for online exams, however
Reading time students are encouraged to review and plan their approach for the exam
before they start. The total exam time should be sufficient to do this.

30 minutes additional time has been incorporated in recognition of the

online environment and the different circumstances that students face in
Additional time
their home environments. This includes allowances for network or
connection issues.

Weighting This exam is weighted at 40 % of your total mark for this course.
Permitted materials This is an open book exam – all materials permitted.
Required/recommended
phone/camera/scanner
materials
Answer ALL questions.
Show all working. Partial credit may be awarded if a substantial part of the
answer is provided.
Total questions: 8
Total marks: 100

Instructions
Answers to the exam must be neatly hand written.
Scan your exam answers and save them as one pdf document. If you do
not have access to a flatbed scanner you can use a phone app such as
“Adobe Scan” or “Microsoft Office Lens”.
Submit your exam answers through Turnitin in the Final Exam folder on
Blackboard.

If you have queries about exam questions, please contact the course
coordinator at [email protected].

Who to contact If you experience any technical difficulties during the exam, contact the
Library AskUs service for advice. You should also ask for an email
documenting the advice provided so you can provide this to the course
coordinator immediately.

Important exam This is an open book exam. You will have access to your own notes,
condition information course texts, and other materials.
The normal academic integrity rules apply.
 You cannot cut-and-paste material other than your own work as
answers.
 You are not permitted to consult any other person – whether directly,
online, or through any other means – about any aspect of this
assessment during the period that this assessment is available.
If it is found that you have given or sought outside assistance with this
assessment then that will be deemed to be cheating and will result in
disciplinary action.
By undertaking this online assessment you will be deemed to have
acknowledged UQ’s academic integrity pledge to have made the following
declaration:
“I certify that my submitted answers are entirely my own work and that I
have neither given nor received any unauthorised assistance on this
assessment item”.
Semester One Final Examination, 2020 ECON7350 Applied Econometrics for Macroeconomics and Finance

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Semester One Final Examination, 2020 ECON7350 Applied Econometrics for Macroeconomics and Finance

PART A: SHORT ANSWERS

Answer ALL questions.

Show all your working. Explain your answers.
Marks are as indicated (Total marks: 25)

Question 1 [4 marks]

Consider the Ljung-Box Q-test.

(a) What is this test primarily used for? (1 mark)

(b) State the null and alternative hypotheses of the test. (1 mark)

(c) When applying the test to residuals of the AR(p), what distribution should be used to
obtain the critical value(s)? (2 marks)

Question 2 [4 marks]

Consider the following ARMA model for {yt }:

p q
X X
yt = a0 + aj yt−j + t + bl t−l ,
j=1 l=1

where {t } is the residual and E(t ) = 0.

(a) Describe the ACF and PACF for the case where a1 = · · · = ap = 0. (1 mark)

(b) Describe the ACF and PACF for the case where b1 = · · · = bq = 0. (1 mark)

(c) Suppose you determine that b1 = · · · = bq = 0 holds. Is this model stationary? Please
provide a short explanation. (2 marks)

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Semester One Final Examination, 2020 ECON7350 Applied Econometrics for Macroeconomics and Finance

Question 3 [4 marks]

Consider the model:

yt = a0 + δt + βyt−1 + t ,
where {t } is white noise.
(a) Under what parameter restrictions is this model stationary? (1 mark)

(b) Under what parameter restrictions is this model trend-stationary ? (1 mark)

(c) Briefly describe a procedure that can be employed to remove the deterministic trend
in this model. (2 marks)

Question 4 [4 marks]

Consider the following VAR(p) model:

A(L)xt = a0 + t , t ∼ N (0, Ω),

where xt is a n × 1 vector and A(1) = In − A1 − · · · − Ap.

(a) Construct the VAR(1) companion form and describe how it can be used to assess
the stability / stationarity of the VAR(p). (2 marks)

(b) Suppose all variables in xt are I(1). Using the properties of A(1), characterise the
cointegration rank of the variables in xt along with the number of common stochastic
trends present. (2 marks)

Question 5 [9 marks]

You are hired as a data analyst by a financial consultant. Your first task is to analyse the
weekly stock price of a client firm. The client is primarily interested in identifying whether
leverage effects are present as well as their magnitude. As a secondary interest, the client
has requested an algorithm to forecast stock price volatility in the short and long term
horizons.
You have been instructed to present a proposal for developing a suitable model that
addresses the client’s inquiries. Please state your proposal using a maximum of 300 words.

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Semester One Final Examination, 2020 ECON7350 Applied Econometrics for Macroeconomics and Finance

PART B: PROBLEM SOLVING

Answer ALL questions.

Show all your working. Explain your answers.
Marks are as indicated (Total marks: 75)

Question 6 [15 marks]

Continuing in your role as a data analyst with the financial consultant, you are provided
weekly exchange rates AUD/USD and AUD/GBP for the period 15/05/2006–09/09/2019 (T =
696). The two series are plotted in Figure 1.

F IGURE 1. Weekly Exchange Rates AUD/USD and GBP form 15/05/2006 to 09/09/2019

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Semester One Final Examination, 2020 ECON7350 Applied Econometrics for Macroeconomics and Finance

Let yt denote the AUD/USD series, and zt denote the AUD/GBP series. You use statistical
software to estimate the following equations (t-statistics in parenthesis):

∆yt = 0.010 − 0.008 × yt−1 − 0.009 × ∆yt−1 + yt ,

(1.54) (−1.52) (−0.25)

∆2 yt = 0.000 − 1.017 × ∆yt−1 + 0.003 × ∆2 yt−1 + ∆yt ,

(0.21) (−18.75) (0.09)

∆zt = 0.016 − 0.009 × zt−1 − 0.041 × ∆zt−1 + zt ,

(1.99) (−2.14) (−1.09)

∆ zt = −0.001 − 1.011 × ∆zt−1 − 0.029 × ∆2 zt−1 + ∆zt ,

2
(−0.86) (−18.43) (−0.77)
 
∆yt = −0.003 − 0.001 yt−1 − 2.69 × zt−1 − 0.115 × ∆yt−1 − 0.100 × ∆yt−2
(−0.54) (−0.22) (−0.23) (−3.04) (−2.64)

+ 0.463 × ∆zt + 0.085 × ∆zt−1 + 0.139 × ∆zt−2 + t .

(22.84) (3.16) (5.21)

(a) Using only the above results, establish the order of integration for yt and zt . (4 marks)

(b) Using only the above results, draw inference about the relationship between yt and
zt . (6 marks)

(c) What inference would you expect to obtain from regressing yt on zt using ordinary
least squares? (5 marks)

Question 7 [20 marks]

You develop the following model designed to forecast the volatility of the AUD/GBP series
(denoted by zt ):

∆zt = a0 + a1 ∆zt−1 + · · · + ap ∆zt−p + t + θ1 t−1 + · · · + θq t−q ,

p
t = νt ht ,
ht = α0 + α1 2t−1 + · · · + αr 2t−r + λδt−1 2t−1 + β1 ht−1 + · · · + βs ht−s .

In this model, δt = 1 if t < 0 and δt = 0 otherwise. Using statistical software, you fit the
model to the data described in Question 6 and obtain the following results.
TABLE 1. Estimated Information Criteria for Alternative Specifications

p q r s λ AIC BIC
1 0 0 0 0 -2819.5 -2805.9
1 1 0 0 0 -2817.9 -2799.7
0 0 1 0 0 -2930.5 -2916.9
1 1 1 1 0 -2970.8 -2943.6
1 0 1 1 unrestricted -2975.1 -2947.8
1 1 1 1 unrestricted -2973.6 -2941.8

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Semester One Final Examination, 2020 ECON7350 Applied Econometrics for Macroeconomics and Finance

Estimated equation (t-statistics in parenthesis):

∆zt = 0.0002 − 0.0228 × zt−1 + t ,

(0.22) (−0.52)

ht = 0.0001 + 0.1027 × 2t−1 + 0.1230 × δt−1 2t−1 + 0.7375 × ht−1 .

(3.97) (3.10) (3.33) (15.45)

(a) Describe the model that has been estimated as well as its main features. Is this a
reasonable specification for the AUD/GBP data? (4 marks)

(b) Using the information in Table 1, justify the specification choice in the estimated
equation. (4 marks)

(c) Test for the presence of heteroscedasticity using the estimated equation. (4 marks)

(d) Test for the presence of leverage effects using the estimated equation. (4 marks)

(e) In addition to the results provided by the estimated equation, you also know that
T = −0.0129, b
b hT = 7.8754 × 10−4 , where 1 × 10−4 = 0.0001.
2T = 1.6577 × 10−4 , and b
Using this information, compute the best forecast of volatility one week following the
end of the sample (i.e., week ending 16/09/2020). (4 marks)

Question 8 [40 marks]

Recall that yt denotes the AUD/USD series, and zt denotes the AUD/GBP series. Let xt =
(yt , zt )0 be a 2 × 1 vector and suppose that using the exchange rates data presented in
Question 6, you now estimate the following vector autoregression (VAR):

0
∆xt = a0 + A1 ∆xt−1 + · · · + Ap ∆xt−p + et , et ∼ N (0, Ω), Ω = B−1 Σ B−1 ,

where Σ is a diagonal matrix with strictly positive diagonal elements. Estimation yields the
following results.

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Semester One Final Examination, 2020 ECON7350 Applied Econometrics for Macroeconomics and Finance

Representation A
! ! ! !
∆yt 0.0005 −0.1780 0.1861 ∆yt−1
= +
∆zt −0.0010 −0.1737 0.1064 ∆zt−1
! ! ! ! !
−0.0648 0.0429 ∆yt−2 eyt eyt 0.0005 0.0005
+ + , Var = ;
0.1119 −0.0853 ∆zt−2 ezt ezt 0.0005 0.0010

Representation B
! ! ! ! !
1 0 ∆yt 0.0005−0.1780 0.1861 ∆yt−1
= +
−0.9401 1 ∆zt −0.0014
−0.0064 −0.0686 ∆zt−1
! ! ! ! !
−0.0648 0.0429 ∆yt−2 yt yt 0.0005 0
+ + , Var = ;
0.1728 −0.1315 ∆zt−2 zt zt 0 0.0006

Representation C
        
∆yt 0.0005 −0.1780 0.1861 −0.0648 0.0492 ∆yt−1 eyt
 ∆z  −0.0010 −0.1737 0.1064 0.1119 −0.0853 ∆z  e 
t    t−1   zt 
= +  +  .
   
 
∆yt−1   0   1 0 0 0  ∆yt−2   0 
∆zt−1 0 0 1 0 0 ∆zt−2 0

In addition, you obtain the following computations:

   
−0.1780 0.1861 −0.0648 0.0492 −0.0655 0.0359 0.0324 −0.0246
−0.1737 0.1064 0.1119 −0.0853  0.1244 −0.1063 0.0232 −0.0176
Ae1 =  ,
 e2 = 
A ,

 1 
 1 0 0 0  −0.1780 0.1861 −0.0648 0.0492 
0 1 0 0 −0.1737 0.1064 0.1119 −0.0853
   
0.0378 −0.0330 0.0083 −0.0063 0.0073 −0.0028 −0.0061 0.0047
 0.0195 −0.0058 −0.200 0.0152  −0.0224 0.0182 −0.0019 0.0015 
Ae3 =  , A
 e4 =  ,

1  1 
−0.0655 0.0359 0.0324 −0.0246  0.0378 −0.0330 0.0083 −0.0063
0.1244 −0.1063 0.0232 −0.0176 0.0195 −0.0058 −0.200 0.0152
! !
1 0 1 0
B= , B−1 = ,
−0.9401 1 0.9401 1
and
e 1 )) = {0.01, 0.02, 0.41}.
abs(eig(A

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Semester One Final Examination, 2020 ECON7350 Applied Econometrics for Macroeconomics and Finance

(a) What is the lag length of the estimated VAR model? How would the lag length be
chosen in practice? (4 marks)

(b) Provide a short description for each of the three representations A, B and C. What
are their main features? (4 marks)

(c) What does the estimated VAR imply about cointegrating relationships among the
variables in xt ? (4 marks)

(d) What do the estimates imply about the stability / stationarity of the system? (4 marks)

(e) Write out all the ARDL equations implied by the estimated VAR. (4 marks)

(f) Consider the effect of an un-anticipated 10 cents increase in the AUD/GBP rate at
time t. Assuming no other shocks occur at any horizon, what is the increase in the
AUD/USD rate on impact (i.e., at time t)? (5 marks)

(g) Consider the effect of an un-anticipated 10 cents increase in the AUD/GBP rate at
time t. Assuming no other shocks occur at any horizon, what is the change in the
AUD/USD rate one week (t + 1) after impact? (5 marks)

(h) Consider the effect of an un-anticipated 10 cents increase in the AUD/GBP rate at
time t. Assuming no other shocks occur at any horizon, what is the change in the
AUD/USD rate three weeks (t + 3) after impact? (5 marks)

(i) Consider the effect of an un-anticipated 10 cents increase in the AUD/GBP rate at
time t. Assuming no other shocks occur at any horizon, what is the total increase in
the AUD/USD rate four weeks (t + 4) after impact? (5 marks)

END OF EXAMINATION
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