Quantitative Analysis and Econometrics Flashcards
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Read the first 7 Quantitative Analysis and Econometrics flashcards as text
A time series exhibits a unit root if its autoregressive parameter equals 1. What is the primary econometric concern with unit root processes?
Answer: Regressions may produce spurious results even when variables are unrelated
Non-stationary unit root series can produce spurious regressions with high R-squared and significant t-statistics even when the variables have no true relationship.
The Augmented Dickey-Fuller (ADF) test adds lagged difference terms to the basic Dickey-Fuller test primarily to:
Answer: Account for serial correlation in the residuals
Augmenting with lagged differences corrects for autocorrelation in the error term, ensuring the test statistic has the correct distribution.
If two non-stationary I(1) series are cointegrated, which modeling approach is most appropriate?
Answer: Apply a Vector Error Correction Model (VECM)
Cointegrated series share a long-run equilibrium, so a VECM captures both the short-run dynamics and the long-run error correction mechanism.
In panel data analysis, the Hausman test is used to choose between:
Answer: Fixed effects and random effects models
The Hausman test checks whether individual-specific effects are correlated with regressors; if they are, fixed effects is consistent but random effects is not.
An ARMA(2,1) model contains which components?
Answer: Two autoregressive terms and one moving average term
ARMA(p,q) notation means p autoregressive lags and q moving average terms, so ARMA(2,1) has AR order 2 and MA order 1.
Which condition must hold for an MA(q) process to be invertible?
Answer: All moving average roots must lie outside the unit circle
Invertibility of an MA process requires that the roots of the MA polynomial lie outside the unit circle, allowing the process to be expressed as a convergent AR representation.
In a probit model, the estimated coefficient on a predictor represents:
Answer: The change in the standard normal z-score (index) for a one-unit change in the predictor
Probit coefficients measure the change in the latent index (z-score) per unit change in X; marginal effects on probabilities require additional calculation using the normal PDF.