FIN3018
Exam Time Table
Code FIN3018

Approved calculators only permitted

LEVEL3
EXAMINATION FOR THE DEGREE OF
BACHELOR OF SCIENCE (FINANCE)

FINANCIAL ECONOMETRICS AND DATA SCIENCE

Monday, 10th January 2022 2:30 PM - 4:30 PM

Examiners: Professor Mark Mulcahy
and the internal examiners
Answer ALL THREE questions
You have TWO hours to complete the paper
Exam (Total: 100 points, Total time: 2 hours)
Answer all questions and problems

1. (a)

i). Which is the dependent variable and which is the independent variable
(3 marks)
ii). Please interpret the regression coefficient as well as the t-values and
R-squared.
(5 marks)
(b) Explain five assumptions of the classical linear regression model given the
model:
= 1 + 2 +
i). () = 0
ii). () =
2 < ∞
iii). (, ) = 0
iv). (, ) = 0
v). ~(0,
2)
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(15 marks)
(c) Consider the following two regression models:
Model 1: = 1 + 22 +
Model 2: = 1 + 22 + 33 +
i). Which model is likely to have a higher R2 and briefly explain the reason?
(3 marks)
ii). Suppose that the R2 is higher for model 2 but the adjusted R2 is lower.
Explain why this is the case.
(3 marks)
iii). Please describe the disadvantage of adjusted R2.
(6 marks)

2. Consider the following three models which a researcher can use to model
stock market prices:
= −1 + (1)
= 0.5−1 + (2)
= 0.8−1 + (3)
(a) What classes of model are these examples belong to?
(2 marks)
(b) Please describe how ACF and PACF look like for each process,
respectively. (You do not need to calculate both functions, simply consider
what shape it might give).
(5 marks)
(c) Which model is more likely to represent stock market prices from a
theoretical perspective, and why?
(8 marks)
(d) Derive the mean and variance for in the following AR(1) model:
= + −1 +
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Assume the process is stationary, and the are serially uncorrelated
disturbance terms.
(20 marks)

3. (a) A variable is defined by the following equation:
= 2−1 − −2 +
Where the are serially uncorrelated disturbance terms. Is the variable I(0),
I(1), or I(2)? If the equation is differenced once, would it be stationary?
Explain your answer.
(20 marks)
(b) Describe the method of parameter estimation in a cointegrating equation
using Engle-Granger Approach. Detail each step.
(10 marks)
(End of Question Paper)
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