Test Bank Questions Chapters 8 and 9

Multiple Choice Test Test Bank Questions No Feedback – Chapters C hapters 8 and 9 Correct answers denoted by an asterisk. 1. What would typically be the shape of the news impact curve for a series that exactly followed a GARCH 1!1" process# a" $t would be asymmetric! with a steeper curve on the left than the ri%ht b" $t would be asymmetric! with a steeper curve on the ri%ht than the left c" & $t would be symmetric about 'ero ' ero d" $t would be discontinuous about 'ero (. Which of the followin% are )*+ features of an $GARCH1!1" model# i" ,orecasts of the conditional variance will conver%e upon the unconditional variance as the hori'on tends to infinity ii" +he sum of the coefficients on the la%%ed s-uared error and the la%%ed conditional variance will be unity iii" ,orecasts of the conditional variance will decline %radually towards 'ero as the hori'on tends to infinity iv" uch models are never observed ob served in reality a" & ii" only b" ii" and iv" only c" ii"! iii" and iv" only d" i"! ii"! iii" and iv" /. Which of the followin% would represent the most appropriate definition for implied volatility# a" & $t is the volatility of the underlyin% asset0s returns implied from the price of a traded option and an option pricin% model b" $t is the volatility of the underlyin% asset0s returns returns implied from a statistical model such as GARCH c" $t is the volatility of an option price implied from a statistical model such as GARCH d" $t is the volatility of an option price implied from the underlyin% asset volatility . uppose that a researcher wanted to obtain an estimate of realised 2actual3" volatility. Which one of the followin% is likely to be the most accurate measure of volatility of stock  returns for a particular day# a" +he price ran%e hi%h minus low" on that day b" +he s-uared return on that day c" & +he sum of the s-uares of hourly ho urly returns on that day d" +he s-uared return on the previous day 4. uppose that a researcher wishes to test for calendar seasonal" effects usin% a dummy variables approach. Which of the followin% re%ressions could be used to examine this# i" i" A re%r re%res essi sion on cont contai aini nin% n% inte interc rcep eptt dumm dummie iess ii" ii" A re%r re%res essi sion on cont contai aini nin% n% slop slopee dum dummi mies es

iii" iv"

A re%ression containin% intercept and slope dummies A re%ression containin% a dummy variable takin% the value 1 for one observation and 'ero for all others

a" ii" and iv" only b" i" and iii" only c" & i"! ii"! and iii" only d" i"! ii"! iii"! and iv". 5. Which of the followin% is the most plausible test re%ression for determinin% whether a series y contains 2ARCH effects3# (

a"  yt 

= α  6 + α  1 y t −1+α  ( y t − ( +α  / y t  − / +α   y t −  +α  4 y t  − 4 +ut  (

b" &  yt 

(

= α  6 + α  1 y t  −1 +α  ( y t  − ( (

(

(

/

(

(

+α  / y t  − / +α   y t  −  (

(

(

+α  4 y t  − 4 (

c"  yt 

= α  6 + α  1 y t −1 +α  ( y t − (

d"  yt 

= α  6 + α  1 y t  −1 +α  ( y t  − ( +α  / y t  − / +α   y t  −  +α  4 y t  − 4

+α  / y t  − /



+α   y t − 

4

+α  4 y t − 4

5

(

+ut 

+ ut  + ut 

7. Consider the followin% conditional variance e-uation for a G8R model. ( ( ht  9 α 6 + α 1 u −1 :β ht ;1:γ   ut ;1  I t;  1 where I t ;1 9 1 if ut ;1 < 6 9 6 otherwise ,or there to be evidence of a levera%e effect! which one of the followin% conditions must hold# a" α 6 positive and statistically si%nificant b" & γ   positive and statistically si%nificant c" γ   statistically si%nificantly %reater than α 6 d" α 1:β  statistically si%nificantly less than γ   t 

=. Consider the three approaches to conductin% hypothesis tests under the maximum likelihood framework. Which of the followin% statements are true# i" +he Wald test is based on estimation only under the null hypothesis ii" +he likelihood ratio test is based on estimation under both the null and the alternative hypotheses iii" +he la%ran%e multiplier test is based on estimation under the alternative hypothesis only iv" +he usual t and ,;tests are examples of Wald tests a" b" c" d"

& ii" and iv" only i" and iii" only i"! ii"! and iv" only i"! ii"! iii"! and iv"

>. $f a series possesses the 2?arkov property3! what wo uld this imply# i" +he series is path;dependent

ii" iii" iv"

a" b" c" d"

All that is re-uired to produce forecasts for the series is the current value of the series plus a transition probability matrix +he state;determinin% variable must be observable +he series can be classified as to whether it is in one re%ime or another re%ime!  but it can only be in one re%ime at any one time & ii" only i" and ii" only i"! ii"! and iii" only i"! ii"! iii"! and iv"

16. Which one of the followin% problems in finance could not be usefully addressed by either a univariate or a multivariate GARCH model# a" @roducin% option prices b" @roducin% dynamic hed%e ratios c" @roducin% time;varyin% beta estimates for a stock  d" & @roducin% forecasts of returns for use in tradin% models e" @roducin% correlation forecasts for value at risk models