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Kai Carstensen
Chair of Econometrics
Examination in Econometrics I
Preliminary remarks:
2. At the beginning of the exam, fill in the cover sheet and hand in after the exam is finished!
4. Write your name and enrolment (matriculation) number on every sheet of paper!
6. The exam problems are printed on 4 pages. Check your copy for completeness!
Good luck!
Problem 1 (19 credits)
Let the explained variable y and the explanatory variables x1 and x2 be random variables with
finite second moments. Assume the conditional expectation of y is
E(y|x1 , x2 ) = β0 + β1 x1 + β2 x2 + β3 x1 x2 , (1)
where E(x1 ) = E(x2 ) = 0. Assume that all necessary higher moments exist and are finite. Assume
that x1 and x2 are independent of each other, implying E(x2 |x1 ) = E(x2 ).
5. Now assume that E(x2 |x1 ) = αx1 . Derive the linear projection L(y|1, x1 ) in terms of the
population parameters.
1
Problem 2 (15 credits)
1. Consider the linear model
(a) Without further information, which methods do you propose to estimate β and Avar(β̂)?
Explain your choices in one sentence each.
(b) Now, assume that the true variance process for the model in equation (2) follows
E(u2i |xi ) = αx2i,K . Which methods do you propose to estimate β and Avar(β̂) now?
Explain your choices in one sentence each.
You observe the corresponding empirical moments from a given data sample
N
0 −1 0.04 0 0 0.7 X
2 0 10 0
(X X) = , (X Y ) = , (ûi xi xi ) = ,
0 0.96 1.0 0 1.0
i=1
with xi = [1 x2i ].
β1 0
(a) Test the null hypothesis = at the 5%-level.
β2 0
(b) Test the null hypothesis β1 = β2 at the 5%-level.
Table:
χ2 -distribution with ν degrees of freedom
(values correspond to the 95%-quantile)
ν 1 2 3 4 5 20 100
2
χ 3.842 5.992 7.815 9.488 11.07 31.41 124.3
2
Problem 3 (17 credits)
1. Consider the following model to estimate the effects of several variables, including cigarette
smoking, on the weight of newborns (bwght):
where male is a binary indicator equal to one if the child is male, parity is the birth order
of the newborn (how many older siblings exist), f aminc is family income, and packs is the
average number of packs of cigarettes smoked per day during pregnancy.
(a) Why might you expect packs to be correlated with u? What would be the consequence
for the OLS estimator?
(b) Suppose that you have data on average cigarette prices in each mother’s region of
residence. Discuss whether this information is likely to satisfy the properties of a good
instrumental variable for packs.
(c) Derive the reduced form for packs, and state the conditions under which the parameters
of equation (4) are identified.
(d) How can the relevance assumption in part (c) be tested?
yi = xi β + ui , (5)
where ui follows a mean zero white noise process, and where the scalar variables y and x
have zero mean. The scalar variable z (also zero mean) is a valid instrument for x. Show
that the 2SLS estimator is equivalent to the IV estimator in this model.
3
Problem 4 !not exam relevant! (9 credits)
Consider the linear times series model for periods t = 1, . . . , T ,
1. Show that the unconditional variance of ut is E(u2t ) = (1+α2 )σ 2 , that the covariance between
ut and ut−1 is E(ut ut−1 ) = ασ 2 , and that the covariances between ut and ut−j , j > 1, are
zero.
2. How do the elements of the matrix Ω needed for GLS estimation of β look like?