SCHOOL OF BUSINESS,

ECONOMICS AND MANAGEMENT

ECF480-ADVANCED ECONOMETRICS

MID SEMESTER EXAMINATION

WEDNESDAY, 16TH OCTOBER 2019

09:00 - 12:00 HOURS

Time Allowed: 3 HOURS plus 5 minutes reading time.

Instructions to Candidates:

1. Read the instructions very carefully.

2. Check that you have the correct examination paper in front of you.

3. There are TWO sections in this question paper. Answer all questions in
section A and any one question in section B.

4. All questions must be answered in the answer booklet provided only.

5. Write down the number of questions that you have answered on the
cover of the examination answer booklet provided.

6. Begin answering each question on a new page in the answer booklet

provided only.

7. No books, files or mechanical/ electronic aids are permitted in the

examination room. Students are permitted to use an electronic
calculator.

8. There shall be NO communication among students during the

examination. Any students caught doing this will be disqualified.

DO NOT TURN OVER UNTIL YOU ARE TOLD TO DO SO.

Page 1 of 7
Attempt all questions

QUESTION ONE

Matrix Algebra is useful in econometrics as it allows us to express large linear

multivariate models in a simple form.

Given the model below;

Y i=β 1 i + β 2i X 1 i + β 3 i X 2 i +… … … .+ β k +1 X ki +U i

a) Express the above model as in Matrix Algebra [5

Marks]
b) Using the expression in a) derive the Classical Linear Regression
Model Assumptions.
[10 Marks]
c) Using the expression in a) derive the OLS estimators of β i ' s [10
Marks]
d) Using the model above, derive the MLE estimators of β i ' s for k=1.
[10
Marks]

[TOTAL: 35
MARKS]

QUESTION TWO

You are employed by government to determine the impact of government

expenditure on economic growth for the period 1978 to 2018. You adopt OLS
method in STATA and obtain the output shown below;

Source SS df MS Number of obs = 40

------------------------------------------- F ( 3, 36) = 9.336241
Model 2.20764046 3 Prob > F = 0.0002
Residual 4.37449588 36 R-squared = 0.335398
------------------------------------------- Adj R-squared = 0.3102378
Total 6.58213634 39 .182837121 Root MSE = .35353

Page 2 of 7
----------------------------------------------------------------------------------------------------------------------
Economic Growth* Coef. Std. Err. t P>|t| [95% Conf. Interval]
---------------------------------------------------------------------------------------------------------------------
Government Exp* 0.226 0.012 18.833 0.000 0.2007 0.249288
Gross Investment* 0.791 0.228 3.4698 0.010 0.3295 1.252472
Net Exports* -0.366 -0.47 0.7787 0.234 0.5853 -1.31728
_cons -1.462 0.75 1.9493 0.048 -2.98 0.056
*Variable in in log form

Using the information on the model above;

a) Provide an economic interpretation for the government expenditure and R²
[3
Marks]
b) Using the test of significance approach and the exact level of significance
approach, carry out a test to determine if government expenditure has an
impact on economic growth at 5%level of significance. [10
Marks]
c) Carry out a test to determine the overall significance of the model at 5% level
of significance. [7
Marks]
d) You carry out a stability test and find that the model is not structurally stable.
Based on your knowledge of the Zambian economy, add a dummy variable;
Di=1; If n=1978 to 1991
=0 otherwise
You then obtain the model below;

Source SS df MS Number of obs = 40

------------------------------------------- F ( 4, 35)= 9.836535
Model 2.20764046 4 Prob > F = 0.0002
Residual 4.37449588 35 R-squared = 0.345398
------------------------------------------- Adj R-squared = 0.3202378
Total 6.58213634 39 .182837121 Root MSE = .35353

----------------------------------------------------------------------------------------------------------------------
Economic Growth* Coef. Std. Err. t P>|t| [95% Conf. Interval]
---------------------------------------------------------------------------------------------------------------------
Government Exp* 0.226 0.012 18.833 0.000 0.2007 0.249288
Gross Investment* 0.791 0.228 3.4698 0.010 0.3295 1.252472
Net Exports* -0.366 -0.47 0.7787 0.234 0.5853 -1.31728
D 0.382 0.109 3.5045 0.009 0.1613 0.602616
_cons -1.462 0.75 1.9493 0.048 -2.98 0.056

Page 3 of 7
 a) Provide an economic interpretation for the dummy variable. Given the result of
the dummy, which model will you proceed with? [5
Marks]
[TOTAL: 25 MARKS]

SECTION B: Answer one question only

QUESTION THREE

a) Given the probability function below,

−n yi
n θ
f ( y i|θ )= e
θ
i. Find the Maximum Likelihood estimator of θ [10
Marks]
ii. State 2 properties of Maximum likelihood estimators [2
Marks]
b) Ordinary Least Squares require that certain assumptions be made to ensure
estimators have their desirable properties. However, these can still have
some desirable properties when their sample bets bigger.
i. What are these properties called? [1
Mark]
ii. Outline 2 of these properties. Include their algebraic representation
[6
Marks]
iii. ^ where
Given an estimator of W, W

^= n θ
W=θ and W
n−1
^ is not an unbiased estimator of W but is asymptotically
Show that W
unbiased where θ is a constant [10
Marks]

Page 4 of 7
 c) In cases of smaller samples, the classical linear regression model
assumptions are to hold if the OLS estimators are going to be BLUE
i. How will a non-constant variance affect the estimators? [3
Marks]
ii. How will a full rank of the regressors’ matrix affect the estimators?
[5
Marks]
iii. How will correlated residuals affect the estimators? [3
Marks]

[TOTAL: 40
MARKS]

QUESTION FOUR

a) Given the assumptions of the classical linear regression model, the least-squares
estimators, in the class of unbiased linear estimators, have minimum variance,
that is, they are BLUE.

i. Prove that indeed the OLS estimators are BLUE if the Gauss-Markov
assumptions hold [8 Marks]

b) You have been tasked to determine the relationship between consumption. and
income. You are provided with hypothetical data on weekly family consumption
expenditure and weekly family income as shown in the table below.

Y 70 65 90 95 110 115 120 140 155 150

X 80 100 120 140 160 180 200 220 240 260

Where;

Y = Weekly Family Consumption Expenditure, $

X = Weekly Family Income, $

i. Express this information in matrix form [5 Marks]

ii. Derive ^β using matrix algebra [10 Marks]

Page 5 of 7
 iii. Interpret the estimated ^β s [4 Marks]
iv. Compute σ^ 2 [6 Marks]
v. It was estimated from the data above that the F statistic was 202.87. Test
the hypothesis that ^β 1= ^β 2=0 at 5% level of significance. [7 Marks]

[TOTAL: 40 MARKS]

END OF EXAMINATION PAPER

FORMULAS

Page 6 of 7
2-Variable Model
2
(∑ x i y i)
∑ U^ 2i =∑ y 2i −
∑ x 2i

R2new −R2old

F=
( df )
1−R2new
( df )
( R 2UR−R2R )
m
F=
(1−R2UR )
n−k

3-Variable Model
^β 0=Ý − ^β 1 X́ 1− ^β2 X́ 2

y i x 1 i ∑ x 22 i−( ∑ y i x 2 i )( ∑ x 1i x 2i )
^β 1= ∑
2
∑ x 21 i ∑ x 22 i−( ∑ x1 i x2 i )

y i x 2 i ∑ x 21 i−( ∑ y i x 1 i )( ∑ x 1i x 2i )
^β 2= ∑
2
∑ x 21 i ∑ x 22 i−( ∑ x1 i x2 i )

2 2 2 2
1 X́ 1 i ∑ x 2 i + X́ 2 i ∑ x1 i−2 X́ 1 X́ 2 ∑ x 1i x 2i 2
^
var ( β 0) = +
n [ ∑ x 2 ∑ x 2 −( ∑ x x ) 1i 2i
2
1i
σi
2i
]
var ( ^β 1) =
∑ x 21 i σi
2
2
∑ x 21i ∑ x 22i −(∑ x 1 i x 2 i )
var ( ^β 2) =
∑ x 22 i σ
2
2 2 2 i
∑ x 1i ∑ x 2i −(∑ x 1 i x 2 i )

Page 7 of 7