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Multiple Choice Test Bank Questions No Feedback – Chapter 8
Correct answers denoted by an asterisk.
1. Which of the following are probably valid criticisms of the Dickey Fuller
methodology?
(i) The tests have a unit root under the null hypothesis and this may not be rejected due to
insufficient information in the sample
(ii) the tests are poor at detecting a stationary process with a unit root close to the non-
stationary boundary
(iii) the tests are highly complex to calculate in practice
(iv) the tests have low power in small samples
2. Which of the following are problems associated with the Engle-Granger approach to
modelling using cointegrated data?
(i) The coefficients in the cointegrating relationship are hard to calculate
(ii) This method requires the researcher to assume that one variable is the dependent
variable and the others are independent variables
(iii) The Engle-Granger technique can only detect one cointegrating relationship
(iv) Engle-Granger does not allow the testing of hypotheses involving the actual
cointegrating relationship.
3. Consider the following vector error correction (VECM) model:
yt = yt-5 + 1yt-1 + 2yt-2 + 3yt-3 + 4yt-4 + ut
where yt is a k 1 vector of variables, and ut is a k 1 vector of disturbances.
Which of the following statements is true of the VECM?
4. Consider the following matrix:
X=
3 6
1 2
What are its characteristic roots?
5. You have the following data for Johansen’s
max rank test for cointegration between 4
international equity market indices:
r
max
5% Critical Value
0
40.03
30.26
1
26.81
23.84
2
13.42
17.72
3
8.66
10.71
How many cointegrating vectors are there?
6. Which criticism of Dickey-Fuller (DF) -type tests is addressed by stationarity tests,
such as the KPSS test?
7. Consider the following data generating process for a series yt:
ttt uyy ++= −1
5.1
Which one of the following most accurately describes the process for yt?
8. Which one of the following best describes most series of asset prices?
9. If there are three variables that are being tested for cointegration, what is the maximum
number of linearly independent cointegrating relationships that there could be?
10. If the number of non-zero eigenvalues of the pi matrix under a Johansen test is 2, this
implies that
11. If a Johansen “max” test for a null hypothesis of 1 cointegrating vectors is applied to
a system containing 4 variables is conducted, which eigenvalues would be used in the
test?
12. Consider the testing of hypotheses concerning the cointegrating vector(s) under the
Johansen approach. Which of the following statements is correct?
13. Which of these is a characteristic of a stationary series?
14. Which of the following are consequences of using non-stationary data in regressions?
(I) Shocks will be persistent
(II) It can lead to spurious regressions
(III) t-ratios will not follow a t-distribution
(IV) F-Statistic will not follow an F-distribution
15. What is the impact of shocks to an AR(1) with no drift
1t t t
y y u
−
= + +
if
1
?
16. What is the impact of shocks to an AR(1) with no drift
1t t t
y y u
−
= + +
if
1
=
?
17. To induce stationarity in a deterministic trend-stationary process
18. The plotted series in the following graph is an example of a:
19. A researcher would like to test for a unit root in a series. She runs the regression
1t t t
y y u
−
= +
. What should her null hypothesis be assuming that she adopts the
Dickey-Fuller test approach?
20. Assuming the researcher in question 19 would like to run an augmented Dickey-
Fuller test instead. What is the appropriate regression she would have to run and the null
hypothesis of the test?
21. Two variables are said to be cointegrated if
22. Assume that you are trying to model the relationship between house prices and rents.
If you find that both series are non-stationary and a linear combination of the two series is
stationary, which of the following is true?
(I) Regressing the levels of house prices on the levels of rents could lead to spurious
regressions
(II) House prices and rents are cointegrated
(III) An appropriate linear combination of house prices and rents is I(1)
(IV) House prices and rents are not cointegrated
