PRIFYSGOL BANGOR

BANGOR UNIVERSITY

ARHOLIADAU DIWEDD SEMESTER 2

END OF SEMESTER 2 EXAMINATIONS
CYFRIFEG A CHYLLID
BANCIO A CHYLLID
ECONOMEG
RHEOLAETH
BUSNES A MARCHNATA
AMSER A GANIATEIR:
TIME ALLOWED:
ASB-3303

MAI 2012
MAY 2012
ACCOUNTING AND FINANCE
BANKING AND FINANCE
ECONOMICS
MANAGEMENT
BUSINESS AND MARKETING

2 AWR
2 HOURS

ECONOMETRICS

NI CHANIATEIR CYFRIFIANELLAU Y GELLER EU RHAGLENNU

NO PROGRAMMABLE CALCULATORS ARE PERMITTED

ANSWER FOUR QUESTIONS FROM SECTION A AND TWO QUESTIONS FROM

SECTION B

STATISTICAL TABLES ATTACHED

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Formula sheet
1/ 2

1
f (x i )
2
2

( x i ) 2
2 2

exp

Probability density function, Normal distribution:

OLS estimation:

n x i yi x i yi
2
2
2
n x i x i

1 y 2 x

var( 1 )

ei
n2

x i

n (x i x)

var( 2 )

(x i x)

e i2

1 n k
2

( y i y)

n 1

;
( x i x )( y i y)

xy

2
2
( x i x ) ( y i y)

Correlation coefficient:

Goodness of fit:

( y i y)

( y i y)

R2 =

( y i y)
k 1

F-tests:

R2

e e
2
i 1

k 2 k1

2
i

e
nk

2
i 2

2
i 2

n k2

S byy
N 1

=
LR test:

Bera-Jarque:

S wyy
NT N

S yy

where

N T
N
2
2
( y it ~y i )
T(~y i y) S w
yy
i 1 t 1
i 1
=
,
=

= 2[ln(L1)ln(L2)]

n 2 n
1
( 2 3) 2
6
24

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Section A
Answer FOUR questions from Section A.
Each question carries 15 marks.
1.

With reference to the two-variable linear regression model:

yi = 1 + 2xi + ui
y i 1 2 x i e i

True (population) model:

Estimated (sample) model:

show the expressions for the ordinary least squares estimators of 1 and 2 are:

1 y 2 x

y
where

n x i yi x i yi
2
2
2
n x i x i

yi
n

x
;

xi
n

; n = number of observations.
(15 marks)

2.

Explain what is meant by the following terms:

(i)
(ii)
(iii)

Unbiasedness
Efficiency
Skewness

(iv)
(v)

Standard error of
Type II error.

(3 marks each)

3.

(a)

Consider the following cross-sectional regression model which has

been estimated using n observations:

y i 1 2 x 2i 3 x 3i ... k x ki

y t
yi =

+ ei,

where

Explain briefly the interpretation of the following expression:

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(b)

( y i y) ( y i y) e i

where

yi
n

Explain how this expression can be used to construct a test of the null
hypothesis H0: 2=3=0.
(7 marks)
For each of the following assumptions concerning the multiple regression
model, describe briefly one method you could use to test the validity of the
assumption.
(i)
(ii)

Normality
Linearity
(4 marks each)

4.

(a)

Explain what is meant by an endogeneity problem.

(4 marks)

(b)

With reference to instrumental variables regression, explain the following

terms:
(i)
(ii)

Instrument relevance
Instrument exogeneity
(4 marks)

5.

(b)

In a regression model where one of the explanatory variables is endogenous

rather than exogenous, explain how an instrumental variables regression
estimated using two stage least squares (2SLS) can be used to obtain
consistent estimates of the regression coefficients.
(7 marks)

(a)

With reference to a regression model that is to be estimated using panel

data, explain the distinction between fixed effects estimation and random
effects estimation.
(6 marks)

(b)

What are the factors that you would take into account when deciding whether
to use fixed effects or random effects estimation?
(9 marks)

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Section B
Answer TWO questions from Section B.
Each question carries 20 marks.
6.

A researcher wishes to obtain the following estimated two-variable linear regression

model:
y i 1 2 x i e i

The model is to be estimated using n=20 observations on the series xi and yi. The
following results are available:

xi

yi

= 407.96

x i yi

= 1137.42

= 82.74

xi

= 5317.12

(x i x)

( y i y)

= 607.98

= 165.31

ei

(a)

= 117.77

Calculate the ordinary least squares estimators,

(b)

Calculate the standard error of the regression,

(c)

Calculate the goodness-of-fit, R2.

and

.
(6 marks)

.
(4 marks)
(4 marks)

(d)

Carry out a test of H0:2=0 against H1:20 using a significance level

of 5%.
(6 marks)

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7.

A researcher is developing a regression model to explain the profitability of a sample

of 2500 small banks, using cross-sectional data for a particular year. The variable
definitions are as follows:
ROA = Return on assets (%) = 100 Net income / Total assets
LASSET = Natural logarithm of total assets
LOAASS = Loans to assets ratio (%) = 100 Total loans / Total assets
NONPER = Non-performing loans ratio (%)
= 100 Non-performing loans / Total loans
The following model has been estimated:
ROA = 2.5410 + 0.1788 LASSET 0.0246 LOAASS 0.0971 NONPER + error
(0.8091) (0.0332)
(0.0107)
(0.0106)
2
( y i y)

Note:

= 37.5432

( y i y)

= 3.8530

ei

= 33.6902

2
( y i y)

is the sum of squared deviations of the dependent variable, ROA,

2
ei
from its own mean.
is the sum of squared residuals (error terms). Standard
errors of estimated coefficients are shown in parentheses.
(a)

Calculate the value of R2 (goodness-of-fit) for this regression.

(3 marks)

(b) Using hypothesis tests based on the estimation results that are reported above, you are
asked to evaluate each of the following assertions

(c)

(i)

The non-performing loans ratio (NONPER) is irrelevant in

determining bank profitability.

(ii)

After allowing for the other controls that are included in the model,
banks with a smaller loans portfolio relative to their assets were more
profitable than banks with a larger loans portfolio.

(iii)

Collectively, the explanatory variables that have been used in the

model are helpful in explaining the variation in profitability.
(9 marks)

(i)

What are the implications for estimation and statistical

inference if multicollinearity is present in this regression?
(4 marks)

(ii)

Describe (without carrying out any calculations) some rules of thumb

that may be used to detect multicollinearity and a method you could
use to test for multicollinearity in this regression.
(4 marks)
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8.

(a)

A researcher has collected the following data on the yit = profitability (return
on equity) of bank i in year t, for a sample of N=3 banks in each of the T=5
years 2003-2007 inclusive:
Year, t Bank, i
2003
2004
2005
2006
2007
Bank sample means:

i=1
4.1
5.7
3.2
6.6
4.9

~y
1

= 4.9

Overall mean:

i=2
4.3
5.2
4.7
3.9
4.4

~y
2
y

= 4.5

i=3
6.9
7.1
8.4
6.2
6.4

~
y3

= 7.0

= 5.5
Test the null hypothesis that the population mean value for return on equity is
the same for each of the three banks.
(5 marks)
(b)

Using a panel data set for a larger number of banks, the researcher is
considering estimating each of the following regression models:
Pooled model:
yit = + 1xit + uit
Within model:
yit = i + 1xit + uit
where yit = return on equity of bank i in year t
xit = log assets of bank i in year t
(i)

Explain how you would interpret the information about the relationship
between log assets and return on equity that is provided by the
estimated versions of the pooled model and the within model.

(ii)

What factors might influence the choice between the use of the fixed
effects and random effects estimators for the estimation of the within
model?

(iii)

Suppose that the researcher now wants to include a time-invariant

explanatory variable, banks geographical location, in the within
group model. Why will the researcher be unable to estimate the
coefficient on the time-invariant explanatory variable?
(5 marks each)
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Diwedd/End