MSc Examination

Thursday 9th May 2013

10:00 12:30

ECOM053 Quantitative Methods for Finance

Duration: 2 hours 30 minutes

YOU ARE NOT PERMITTED TO READ THE CONTENTS OF THIS QUESTION PAPER UNTIL
INSTRUCTED TO DO SO BY AN INVIGILATOR

Answer two questions from Section A and two questions from Section B
Questions from Section A are worth 20%
Questions from Section B are worth 30%
If you answer more questions than specified, only the first answers (up to the specified
number) will be marked. Cross out any answers that you do not wish to be marked
Calculators are permitted in this examination. Please state on your answer book the name and
type of machine used.
Complete all rough workings in the answer book and cross through any work that is not to be
assessed.
Possession of unauthorised material at any time when under examination conditions is an
assessment offence and can lead to expulsion from QMUL. Check now to ensure you do not have
any notes, mobile phones or unauthorised electronic devices on your person. If you do, raise your
hand and give them to an invigilator immediately. It is also an offence to have any writing of any
kind on your person, including on your body. If you are found to have hidden unauthorised material
elsewhere, including toilets and cloakrooms it will be treated as being found in your possession.
Unauthorised material found on your mobile phone or other electronic device will be considered
the same as being in possession of paper notes. A mobile phone that causes a disruption in the
exam is also an assessment offence.
EXAM PAPERS MUST NOT BE REMOVED FROM THE EXAM ROOM
Leone Leonida

Queen Mary, University of London, 2013

Page 2

ECOM053 (2013)

Section A

Question 1
In order to evaluate the effect of size, S i , and the Market-to-book ratio, MBi , on the
annual rate of return of the stock, ri , you run a cross-sectional regression with 150
observations. The fitted model is:
(1)

ri 0.08 0.801Si 0.321MBi , R 2 0.66 .

1. What variables would you consider removing from the set of independent
variables, if the standard error for S and MB are 0.147 and 0.136, respectively?
(10 marks)
2. Comment on the value (sign and magnitude) of the estimated coefficients and on
the goodness-of-fit measure.
(5 marks)
3. If the size of the firm increases by 10 units, what is the estimated effect on the
rate of return?
(5 marks)

Question 2
Consider the following model:
(2)

yt 1 2 x2t 3 x3t 4 x4t 5 x5t ut .

The regression is carried out on a sample of 96 observations. You want to test the
following null hypothesis:
H 0 : 3 4 1; 5 1

1. Can you use the t-test procedure? Discuss.

(5 marks)

2. Write down the restricted model.

(5 marks)

3. The residual sum of squares for the restricted and the unrestricted models is
102.87 and 91.41, respectively. Perform the test and give the conclusion
(10 marks)

ECOM053 (2013)

Page 3

Question 3
Consider the following model:

yt yt 1 t ,
where t ~ i.i.d.0, 2 , and

y0 0

1.

What are issues in estimating the model above via OLS if 1 ? Discuss.
(10 marks)

2.

How do you test the null hypothesis that 1 ? Discuss.

(10 marks)

Section B

Question 4
1.

Define and discuss heteroskedasticity in the classical linear regression

model.
(10 marks)

2.

What tests can you use in order to detect heteroskedasticity? Discuss the
testing procedures.
(10 marks)

3.

How do you deal with heteroskedasticity?

(10 marks)

Question 5
Consider the following model:

Performanceit Schooling it it
where the dependent variable is the performance of the manager i at time t, and the
regressor is the time manager has devoted to education.
1. Can you use standard OLS model to estimate parameters? Why yes or not?
(15 marks)
2. Write down the model augmented by fixed effects. Discuss how you deal with the
estimation issues by using the LSDV model. What are the drawbacks in this
procedure? How would you solve these drawbacks?
(15 marks)

Page 4

ECOM053 (2013)

Question 6
1. Assume you want to estimate the probability of the firm paying dividends. Disucss
the main drawbacks of the Linear Probability model in this framework.
(5 marks)
2. Discuss how to measure the marginal effect in the case of the Probit Model.
(10 marks)
3. Assume you estimate the model by means of OLS, Logit and Probit approaches.
Do you expect to find differences in the estimated coefficients? Discuss.
(15 marks)
End of Paper