CEA Quantitative Analysis and Econometrics 3

Question 1

A time series exhibits a unit root if its autoregressive parameter equals 1. What is the primary econometric concern with unit root processes?

Accepted Answer

Regressions may produce spurious results even when variables are unrelated

Answer

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.

Question 2

The Augmented Dickey-Fuller (ADF) test adds lagged difference terms to the basic Dickey-Fuller test primarily to:

Accepted Answer

Account for serial correlation in the residuals

Answer

Augmenting with lagged differences corrects for autocorrelation in the error term, ensuring the test statistic has the correct distribution.

Question 3

If two non-stationary I(1) series are cointegrated, which modeling approach is most appropriate?

Accepted Answer

Apply a Vector Error Correction Model (VECM)

Answer

Cointegrated series share a long-run equilibrium, so a VECM captures both the short-run dynamics and the long-run error correction mechanism.

Question 4

In panel data analysis, the Hausman test is used to choose between:

Accepted Answer

Fixed effects and random effects models

Answer

The Hausman test checks whether individual-specific effects are correlated with regressors; if they are, fixed effects is consistent but random effects is not.

Question 5

An ARMA(2,1) model contains which components?

Accepted Answer

Two autoregressive terms and one moving average term

Answer

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.

(CEA) Certified Economic Analyst Practice Test

(CEA) Certified Economic Analyst Practice Test

CEA Quantitative Analysis and Econometrics 3