MSc Examination

Thursday 9th May 2013 10:00 – 12:30

ECOM053 Quantitative Methods for Finance Duration: 2 hours 30 minutes

YOU ARE NOT PERMITTED TO READ THE CONTENTS OF THIS QUESTION PAPER UNTIL INSTRUCTED TO DO SO BY AN INVIGILATOR

Answer two questions from Section A and two questions from Section B

Questions from Section A are worth 20%

Questions from Section B are worth 30%

If you answer more questions than specified, only the first answers (up to the specified number) will be marked. Cross out any answers that you do not wish to be marked

Calculators are permitted in this examination. Please state on your answer book the name and type of machine used.

Complete all rough workings in the answer book and cross through any work that is not to be assessed. Possession of unauthorised material at any time when under examination conditions is an assessment offence and can lead to expulsion from QMUL. Check now to ensure you do not have any notes, mobile phones or unauthorised electronic devices on your person. If you do, raise your hand and give them to an invigilator immediately. It is also an offence to have any writing of any kind on your person, including on your body. If you are found to have hidden unauthorised material elsewhere, including toilets and cloakrooms it will be treated as being found in your possession. Unauthorised material found on your mobile phone or other electronic device will be considered the same as being in possession of paper notes. A mobile phone that causes a disruption in the exam is also an assessment offence.

EXAM PAPERS MUST NOT BE REMOVED FROM THE EXAM ROOM

Leone Leonida

© Queen Mary, University of London, 2013

Page 2 ECOM053 (2013)

Section A

Question 1

In order to evaluate the effect of size, iS , and the Market-to-book ratio, iMB , on the

annual rate of return of the stock, ir , you run a cross-sectional regression with 150

observations. The fitted model is:

(1) ,321.0801.008.0 iii MBSr

66.02 R .

1. What variables would you consider removing from the set of independent variables, if the standard error for S and MB are 0.147 and 0.136, respectively?

(10 marks)

2. Comment on the value (sign and magnitude) of the estimated coefficients and on the goodness-of-fit measure. (5 marks)

3. If the size of the firm increases by 10 units, what is the estimated effect on the rate of return? (5 marks)

Question 2

Consider the following model:

(2) tttttt uxxxxy 554433221 .

The regression is carried out on a sample of 96 observations. You want to test the following null hypothesis:

1;1: 5430 H

1. Can you use the t-test procedure? Discuss. (5 marks)

2. Write down the restricted model. (5 marks)

3. The residual sum of squares for the restricted and the unrestricted models is 102.87 and 91.41, respectively. Perform the test and give the conclusion (10 marks)

ECOM053 (2013) Page 3

Question 3

Consider the following model:

ttt yy 1 ,

where 20,i.i.d.~ t , and 00 y

1. What are issues in estimating the model above via OLS if 1 ? Discuss.

(10 marks)

2. How do you test the null hypothesis that 1 ? Discuss. (10 marks)

Section B

Question 4

1. Define and discuss heteroskedasticity in the classical linear regression model. (10 marks)

2. What tests can you use in order to detect heteroskedasticity? Discuss the testing procedures. (10 marks)

3. How do you deal with heteroskedasticity? (10 marks)

Question 5

Consider the following model:

ititit SchoolingePerformanc

where the dependent variable is the performance of the manager i at time t, and the regressor is the time manager has devoted to education.

1. Can you use standard OLS model to estimate parameters? Why yes or not? (15 marks)

2. Write down the model augmented by fixed effects. Discuss how you deal with the estimation issues by using the LSDV model. What are the drawbacks in this procedure? How would you solve these drawbacks? (15 marks)

Page 4 ECOM053 (2013)

Question 6

1. Assume you want to estimate the probability of the firm paying dividends. Disucss the main drawbacks of the Linear Probability model in this framework. (5 marks)

2. Discuss how to measure the marginal effect in the case of the Probit Model. (10 marks)

3. Assume you estimate the model by means of OLS, Logit and Probit approaches. Do you expect to find differences in the estimated coefficients? Discuss.

(15 marks)

End of Paper