{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

ProblemSet6Ans

# ProblemSet6Ans - ECON 3200 Introduction to Econometrics...

This preview shows pages 1–2. Sign up to view the full content.

ECON 3200 Introduction to Econometrics Answers for Problem Set 6 Problem 1 (Wooldridge 11.4) Assuming y 0 = 0 is a special case of assuming y 0 nonrandom, and so we can obtain the variances from (11.21): Var( y t ) = 2 e σ t and Var( y t+h ) = 2 e σ ( t + h ), h > 0. Because E( y t ) = 0 for all t (since E( y 0 ) = 0), Cov( y t , y t+h ) = E( y t y t+h ) and, for h > 0, E( y t y t+h ) = E[( e t + e t-1 + K e 1 )( e t+h + e t+h -1 + K + e 1 )] = E( 2 t e ) + E( 2 1 t e - ) + K + E( 2 1 e ) = 2 e σ t , where we have used the fact that { e t } is a pairwise uncorrelated sequence. Therefore, Corr( y t , y t+h ) = Cov( y t , y t+h )/ Var( ) Var( ) t t h y y + = t / ( ) t t h = /( t t h . Problem 2 (Wooldridge 11.6) 1. The t statistic for H 0 : β 1 = 1 is t = (1.104 – 1)/.039 2.67. Although we must rely on asymptotic results, we might as well use df = 120 in Table G.2. So the 1% critical value against a two-sided alternative is about 2.62, and so we reject H 0 : β 1 = 1 against H 1 : β 1 1 at the 1% level. It is hard to know whether the estimate is practically different from one without comparing investment strategies based on the theory ( β 1 = 1) and the estimate ( 1 ˆ β = 1.104). But the estimate is 10% higher than the theoretical value.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}