Reading 2 Time-Series Analysis
Reading 2 Time-Series Analysis
Alexis Popov, CFA, is analyzing monthly data. Popov has estimated the model xt = b0 + b1 × xt-1
+ b2 × xt-2 + et. The researcher finds that the residuals have a significant ARCH process. The
best solution to this is to:
Barry Phillips, CFA, has the following time series observations from earliest to latest: (5, 6, 5, 7,
6, 6, 8, 8, 9, 11). Phillips transforms the series so that he will estimate an autoregressive process
on the following data (1, -1, 2, -1, 0, 2, 0, 1, 2). The transformation Phillips employed is called:
A) first differencing.
B) moving average.
C) beta drift.
A) 0.6151.
B) 1.6258.
C) 7.3220.
Bill Johnson, CFA, has prepared data concerning revenues from sales of winter clothing made
by Polar Corporation. This data is presented (in $ millions) in the following table:
2013.1 182
2013.2 74 −108
2013.3 78 4 −108
2014.3 90 11 −115 4
The value that Johnson should enter in the table in place of "w" is:
A) −115.
B) −48.
C) 164.
Imagine that Johnson prepares a change-in-sales regression analysis model with seasonality,
which includes the following:
Coefficients
Intercept −6.032
Lag 1 0.017
Lag 4 0.983
Based on the model, expected sales in the first quarter of 2015 will be closest to:
A) 155.
B) 210.
C) 190.
Question #7 - 9 of 93 Question ID: 1543896
To test for covariance-stationarity in the data, Johnson would most likely use a:
A) Dickey-Fuller test.
B) t-test.
C) Durbin-Watson test.
A) invalid estimates of regression coefficients, but the standard errors will still be valid.
B) invalid standard errors of regression coefficients and invalid statistical tests.
C) invalid standard errors of regression coefficients, but statistical tests will still be valid.
Consider the estimated model xt = −6.0 + 1.1 xt − 1 + 0.3 xt − 2 + εt that is estimated over 50
periods. The value of the time series for the 49th observation is 20 and the value of the time
series for the 50th observation is 22. What is the forecast for the 52nd observation?
A) 27.22.
B) 24.2.
C) 42.
Trend models can be useful tools in the evaluation of a time series of data. However, there are
limitations to their usage. Trend models are not appropriate when which of the following
violations of the linear regression assumptions is present?
A) Heteroskedasticity.
B) Model misspecification.
C) Serial correlation.
Which of the following statements regarding unit roots in a time series is least accurate?
Yolanda Seerveld is an analyst studying the growth of sales of a new restaurant chain called
Very Vegan. The increase in the public's awareness of healthful eating habits has had a very
positive effect on Very Vegan's business. Seerveld has gathered quarterly data for the
restaurant's sales for the past three years. Over the twelve periods, sales grew from $17.2
million in the first quarter to $106.3 million in the last quarter. Because Very Vegan has
experienced growth of more than 500% over the three years, the Seerveld suspects an
exponential growth model may be more appropriate than a simple linear trend model.
However, she begins by estimating the simple linear trend model:
(sales)t = α + β × (Trend)t + εt
Regression Statistics
Multiple R 0.952640
R2 0.907523
Adjusted R2 0.898275
Observations 12
1st order autocorrelation coefficient of the
residuals: −0.075
ANOVA
df SS
Regression 1 6495.203
Residual 10 661.8659
Total 11 7157.069
Regression Statistics
Multiple R 0.952028
R2 0.906357
Adjusted R2 0.896992
Observations 12
ANOVA
df SS
Regression 1 2.6892
Residual 10 0.2778
Total 11 2.9670
Coefficients Standard Error
Seerveld compares the results based upon the output statistics and conducts two-tailed tests at
a 5% level of significance. One concern is the possible problem of autocorrelation, and Seerveld
makes an assessment based upon the first-order autocorrelation coefficient of the residuals
that is listed in each set of output. Another concern is the stationarity of the data. Finally, the
analyst composes a forecast based on each equation for the quarter following the end of the
sample.
A) The simple trend regression is not, but the log-linear trend regression is.
B) Yes, both are significant.
C) The simple trend regression is, but not the log-linear trend regression.
With respect to the possible problems of autocorrelation and nonstationarity, using the log-
linear transformation appears to have:
A) $97.6 million.
B) $113.0 million.
C) $123.0 million.
Using the log-linear trend model, the forecast of sales for Very Vegan for the first out-of-sample
period is:
A) $109.4 million.
B) $117.0 million.
C) $121.2 million.
Which of the following is least likely a consequence of a model containing ARCH(1) errors? The:
Barry Phillips, CFA, has estimated an AR(1) relationship (xt = b0 + b1 × xt-1 + et) and got the
following result: xt+1 = 0.5 + 1.0xt + et. Phillips should:
Suppose you estimate the following model of residuals from an autoregressive model:
If the residual at time t is 2.0, the forecasted variance for time t+1 is:
A) 3.2.
B) 2.0.
C) 3.6.
Diem Le is analyzing the financial statements of McDowell Manufacturing. He has modeled the
time series of McDowell's gross margin over the last 16 years. The output is shown below.
Assume 5% significance level for all statistical tests.
Autoregressive Model
Regression Statistics
R-squared 0.767
Observations 64
Autocorrelation of Residuals
Quarter Observation
What is the forecast for the gross margin in the first quarter of 2004?
A) 0.246.
B) 0.250.
C) 0.256.
A) nothing.
an ARCH process exists because the autocorrelation coefficients of the residuals have
B)
different signs.
C) heteroskedasticity is not a problem because the DW statistic is not significant.
Supposing the time series is actually a random walk, which of the following approaches would
be appropriate prior to using an autoregressive model?
(Salest - Sales t-1) = 30 + 1.25 (Sales t-1 - Sales t-2) + 1.1 (Sales t-4 - Sales t-5) t=1,2,.. T
t Period Sales
T 2000.2 $2,000
A) $2,270.00.
B) $2,625.00.
C) $1,730.00.
David Wellington, CFA, has estimated the following log-linear trend model: LN(xt) = b0 + b1t + εt.
Using six years of quarterly observations, 2001:I to 2006:IV, Wellington gets the following
estimated equation: LN(xt) = 1.4 + 0.02t. The first out-of-sample forecast of xt for 2007:I is
closest to:
A) 4.14.
B) 1.88.
C) 6.69.
Suppose you estimate the following model of residuals from an autoregressive model:
If the residual at time t is 0.9, the forecasted variance for time t+1 is:
A) 0.790.
B) 0.850.
C) 0.736.
The main reason why financial and time series intrinsically exhibit some form of nonstationarity
is that:
Modeling the trend in a time series of a variable that grows at a constant rate with continuous
compounding is best done with:
An analyst wants to model quarterly sales data using an autoregressive model. She has found
that an AR(1) model with a seasonal lag has significant slope coefficients. She also finds that
when a second and third seasonal lag are added to the model, all slope coefficients are
significant too. Based on this, the best model to use would most likely be an:
Suppose that the time series designated as Y is mean reverting. If Yt+1 = 0.2 + 0.6 Yt, the best
prediction of Yt+1 is:
A) 0.5.
B) 0.3.
C) 0.8.
Question #33 of 93 Question ID: 1472150
Which of the following statements regarding time series analysis is least accurate?
A) If a time series is a random walk, first differencing will result in covariance stationarity.
B) We cannot use an AR(1) model on a time series that consists of a random walk.
An autoregressive model with two lags is equivalent to a moving-average model with
C)
two lags.
Dianne Hart, CFA, is considering the purchase of an equity position in Book World, Inc, a leading
seller of books in the United States. Hart has obtained monthly sales data for the past seven
years, and has plotted the data points on a graph. Hart notices that the revenues are growing
at approximately 4.5% per year. Which of the following statements regarding Hart's analysis of
the data time series of Book World's sales is most accurate? Hart should utilize a:
mean-reverting model to analyze the data because the time series pattern is
A)
covariance stationary.
B) linear model to analyze the data because the mean appears to be constant.
log-linear model to analyze the data because it is likely to exhibit a compound growth
C)
trend.
Rhonda Wilson, CFA, is analyzing sales data for the TUV Corp, a current equity holding in her
portfolio. She observes that sales for TUV Corp. have grown at a steadily increasing rate over
the past ten years due to the successful introduction of some new products. Wilson anticipates
that TUV will continue this pattern of success. Which of the following models is most
appropriate in her analysis of sales for TUV Corp?
A log-linear trend model, because the data series can be graphed using a straight,
A)
upward-sloping line.
A log-linear trend model, because the data series exhibits a predictable, exponential
B)
growth trend.
A linear trend model, because the data series is equally distributed above and below
C)
the line and the mean is constant.
The primary concern when deciding upon a time series sample period is which of the following
factors?
A time series that has a unit root can be transformed into a time series without a unit root
through:
A) mean reversion.
B) calculating moving average of the residuals.
C) first differencing.
Which of the following is NOT a requirement for a series to be covariance stationary? The:
Frank Batchelder and Miriam Yenkin are analysts for Bishop Econometrics. Batchelder and
Yenkin are discussing the models they use to forecast changes in China's GDP and how they
can compare the forecasting accuracy of each model. Batchelder states, "The root mean
squared error (RMSE) criterion is typically used to evaluate the in-sample forecast accuracy of
autoregressive models." Yenkin replies, "If we use the RMSE criterion, the model with the
largest RMSE is the one we should judge as the most accurate."
A time series that is first differenced can be adjusted for seasonality by incorporating
A)
the first-differenced value for the previous year's corresponding period.
Not correcting for seasonality when, in fact, seasonality exists in the time series results
B)
in a violation of an assumption of linear regression.
C) The presence of seasonality makes it impossible to forecast using a time-series model.
Alexis Popov, CFA, has estimated the following specification: xt = b0 + b1 × xt-1 + et. Which of the
following would most likely lead Popov to want to change the model's specification?
C) b0 < 0.
The table below shows the autocorrelations of the lagged residuals for quarterly theater ticket
sales that were estimated using the AR(1) model: ln(salest) = b0 + b1(ln salest − 1) + et. Assuming
the critical t-statistic at 5% significance is 2.0, which of the following is the most likely
conclusion about the appropriateness of the model? The time series:
Jason Cranwell, CFA, has hypothesized that sales of luxury cars have grown at a constant rate
over the past 15 years.
b0 0.4563
b1 0.6874
R-squared 0.7548
F 12.63
Observations 180
A) 1.26.
B) 1.46.
C) 1.66.
Cranwell is aware that the Dickey Fuller test can be used to discover whether a model has a unit
root. He is also aware that the test would use a revised set of critical t-values. What would it
mean to reject the null of the Dickey Fuller test (Ho: g = 0) ?
A) use the provided Durbin Watson statistic and compare it to a critical value.
B) use a t-test on the residual autocorrelations over several lags.
determine if the series has a finite and constant covariance between leading and
C)
lagged terms of itself.
When using the root mean squared error (RMSE) criterion to evaluate the predictive power of
the model, which of the following is the most appropriate statement?
A) Use the model with the highest RMSE calculated using the in-sample data.
B) Use the model with the lowest RMSE calculated using the out-of-sample data.
C) Use the model with the lowest RMSE calculated using the in-sample data.
Which of the following statements regarding the instability of time-series models is most
accurate? Models estimated with:
a greater number of independent variables are usually more stable than those with a
A)
smaller number.
B) longer time series are usually more stable than those with shorter time series.
C) shorter time series are usually more stable than those with longer time series.
The estimation results of an AR model involving a time series that is not covariance
A)
stationary are meaningless.
A time series that is covariance stationary may have residuals whose mean changes
B)
over time.
C) A time series may be both covariance stationary and heteroskedastic.
A time series x that is a random walk with a drift is best described as:
A) xt = xt − 1 + εt.
B) xt = b0 + b1 xt − 1.
C) xt = b0 + b1xt − 1 + εt.
1 1 - -
2 -1 0.35 -1.35
3 2 1.45 0.55
4 -1 -0.2 -0.8
5 0 1.45 -1.45
6 2 0.9 1.1
7 0 -0.2 0.2
8 1 0.9 0.1
9 2 0.35 1.65
The following sets of data are ordered from earliest to latest. To test for ARCH, the researcher
should regress:
A) (-1.35, 0.55, -0.8, -1.45, 1.1, 0.2, 0.1, 1.65) on (0.35, 1.45, -0.2, 1.45, 0.9, -0.2, 0.9, 0.35).
(1.8225, 0.3025, 0.64, 2.1025, 1.21, 0.04, 0.01) on (0.3025, 0.64, 2.1025, 1.21, 0.04, 0.01,
B)
2.7225).
C) (1, 4, 1, 0, 4, 0, 1, 4) on (1, 1, 4, 1, 0, 4, 0, 1).
(Salest - Sales t-1)= 100 - 1.5 (Sales t-1 - Sales t-2) + 1.2 (Sales t-4 - Sales t-5) t=1,2,.. T
t Period Sales
T 2000.2 $1,000
A) $730.00.
B) $1,430.00.
C) $1,730.00.
Barry Phillips, CFA, is analyzing quarterly data. He has estimated an AR(1) relationship (xt = b0 +
b1 × xt-1 + et) and wants to test for seasonality. To do this he would want to see if which of the
following statistics is significantly different from zero?
A) Correlation(et, et-4).
B) Correlation(et, et-1).
C) Correlation(et, et-5).
Question #54 of 93 Question ID: 1472134
The regression results from fitting an AR(1) model to the first-differences in enrollment growth
rates at a large university includes a Durbin-Watson statistic of 1.58. The number of quarterly
observations in the time series is 60. At 5% significance, the critical values for the Durbin-
Watson statistic are dl = 1.55 and du = 1.62. Which of the following is the most accurate
interpretation of the DW statistic for the model?
C) Since dl < DW < du, the results of the DW test are inconclusive.
Winston Collier, CFA, has been asked by his supervisor to develop a model for predicting the
warranty expense incurred by Premier Snowplow Manufacturing Company in servicing its
plows. Three years ago, major design changes were made on newly manufactured plows in an
effort to reduce warranty expense. Premier warrants its snowplows for 4 years or 18,000 miles,
whichever comes first. Warranty expense is higher in winter months, but some of Premier's
customers defer maintenance issues that are not essential to keeping the machines functioning
to spring or summer seasons. The data that Collier will analyze is in the following table (in $
millions):
Seasonal Lagged
Change in Lagged Change in
Warranty Change in
Quarter Warranty Warranty Expense
Expense Warranty Expense
Expense yt yt-1
yt-4
2002.1 103
2002.2 52 –51
Winston submits the following results to his supervisor. The first is the estimation of a trend
model for the period 2002:1 to 2004:4. The model is below. The standard errors are in
parentheses.
(14.37) (1.97)
R-squared = 16.2%
Winston also submits the following results for an autoregressive model on the differences in
the expense over the period 2004:to 2004:4. The model is below where "y" represents the
change in expense as defined in the table above. The standard errors are in parentheses.
R-squared = 99.98%
After receiving the output, Collier's supervisor asks him to compute moving averages of the
sales data.
Collier's supervisors would probably not want to use the results from the trend model for all of
the following reasons EXCEPT:
A) the model is a linear trend model and log-linear models are always superior.
B) the slope coefficient is not significant.
it does not give insights into the underlying dynamics of the movement of the
C)
dependent variable.
Question #56 - 58 of 93 Question ID: 1472159
For this question only, assume that Winston also ran an AR(1) model with the following results:
yt = −0.9 − 0.23* yt −1 + et
R-squared = 78.3%
(0.823) (0.0222)
A) 1.16.
B) −0.73.
C) 0.77.
Based on the autoregressive model, expected warranty expense in the first quarter of 2005 will
be closest to:
A) $51 million.
B) $60 million.
C) $65 million.
A) Yes, because the coefficient on yt–4 is large compared to its standard error.
C) No, because the slope coefficients in the autoregressive model have opposite signs.
Albert Morris, CFA, is evaluating the results of an estimation of the number of wireless phone
minutes used on a quarterly basis within the territory of Car-tel International, Inc. Some of the
information is presented below (in billions of minutes):
Total 27 10,315.051
The variance of the residuals from one time period within the time series is not dependent on
the variance of the residuals in another time period.
Morris also models the monthly revenue of Car-tel using data over 96 monthly observations.
The model is shown below:
The value for WPM this period is 544 billion. Using the results of the model, the forecast
Wireless Phone Minutes three periods in the future is:
A) 691.30.
B) 586.35.
C) 683.18.
Question #60 - 62 of 93 Question ID: 1472102
A) 381.29 million.
B) 8.83 million.
C) 43.2 million.
Morris concludes that the current price of Car-tel stock is consistent with single stage constant
growth model (with g=3%). Based on this information, the sales model is most likely:
A) Incorrectly specified and first differencing the data would be an appropriate remedy.
B) Correctly specified.
Incorrectly specified and first differencing the natural log of the data would be an
C)
appropriate remedy.
test autocorrelations of the residuals for a simple trend model, and specify the number
A)
of significant lags.
estimate an autoregressive model (for example, an AR(1) model), calculate the
B) autocorrelations for the model's residuals, test whether the autocorrelations are
different from zero, and add an AR lag for each significant autocorrelation.
estimate an autoregressive model (e.g., an AR(1) model), calculate the autocorrelations
C) for the model's residuals, test whether the autocorrelations are different from zero,
and revise the model if there are significant autocorrelations.
David Brice, CFA, has used an AR(1) model to forecast the next period's interest rate to be 0.08.
The AR(1) has a positive slope coefficient. If the interest rate is a mean reverting process with
an unconditional mean, a.k.a., mean reverting level, equal to 0.09, then which of the following
could be his forecast for two periods ahead?
A) 0.113.
B) 0.072.
C) 0.081.
Consider the estimated AR(2) model, xt = 2.5 + 3.0 xt-1 + 1.5 xt-2 + εt t=1,2,...50. Making a
prediction for values of x for 1 ≤ t ≤ 50 is referred to as:
A) an out-of-sample forecast.
B) an in-sample forecast.
C) requires more information to answer the question.
Question #66 of 93 Question ID: 1472185
A) (Salest - Sales t-1)= b0 + b1 (Sales t-1 - Sales t-2) + b2 (Sales t-4 - Sales t-5) + εt.
Consider the estimated model xt = -6.0 + 1.1 xt-1 + 0.3 xt-2 + εt that is estimated over 50 periods.
The value of the time series for the 49th observation is 20 and the value of the time series for
the 50th observation is 22. What is the forecast for the 51st observation?
A) 30.2.
B) 23.
C) 24.2.
To qualify as a covariance stationary process, which of the following does not have to be true?
C) E[xt] = E[xt+1].
Time Value
2005: I 62
2005: II 62
2005: III 66
2005: IV 66
2006: I 72
2006: II 70
2006: III 64
2006: IV 66
A) 67.20.
B) 66.40.
C) 66.60.
A) AR(2).
B) AR(1).
C) AR(12).
Housing industry analyst Elaine Smith has been assigned the task of forecasting housing
foreclosures. Specifically, Smith is asked to forecast the percentage of outstanding mortgages
that will be foreclosed upon in the coming quarter. Smith decides to employ multiple linear
regression and time series analysis.
Besides constructing a forecast for the foreclosure percentage, Smith wants to address the
following two questions:
Smith contends that adjustable rate mortgages often are used by higher risk borrowers and
that their homes are at higher risk of foreclosure. Therefore, Smith decides to use short-term
interest rates as one of the independent variables to test Research Question 1.
Smith uses quarterly data over the past 5 years to derive her regression. Smith's regression
equation is provided in Exhibit 1:
Foreclosure = the percentage of all outstanding mortgages foreclosed upon during the
share quarter
= the quarterly change in the 1-year Treasury bill rate (e.g., ΔINT = 2 for a
ΔINT
two percentage point increase in interest rates)
STIM = 1 for quarters in which a Federal fiscal stimulus package was in place
= 1 for quarters in which the median house price is one standard deviation
CRISIS
below its 5-year moving average
Regression 3 15 5.0000
Error 16 5 0.3125
Total 19 20
Smith expresses the following concerns about the test statistics derived in her regression:
Before completing her analysis, Smith runs a regression of the changes in foreclosure share on
its lagged value. The following regression results and autocorrelations were derived using
quarterly data over the past 5 years ( Exhibit 4 and Exhibit 5, respectively):
1 0.05 0.22
2 -0.35 -1.53
3 0.25 1.09
4 0.10 0.44
The most appropriate interpretation from the foreclosure share regression equation model is:
A) Multiple-R of the model is 0.87.
B) Variable STIM explains 37.5% of the variation in foreclosure share.
C) Multiple-R of the model is 0.75.
Based on her regression results in Exhibit 2, using a 5% level of significance, Smith should
conclude that:
The most recent change in foreclosure share was +1 percent. Smith decides to base her
analysis on the data and methods provided in Exhibit 4 and Exhibit 5, and determines that the
two-step ahead forecast for the change in foreclosure share (in percent) is 0.125, and that the
mean reverting value for the change in foreclosure share (in percent) is 0.071. Is Smith correct?
A) Smith is correct on the two-step ahead forecast for change in foreclosure share only.
Smith is correct on the mean-reverting level for forecast of change in foreclosure share
B)
only.
C) Smith is correct on both the forecast and the mean reverting level.
Assume for this question that Smith finds that the foreclosure share series has a unit root.
Under these conditions, she can most reliably regress foreclosure share against the change in
interest rates (ΔINT) if:
A) ΔINT has unit root and is not cointegrated with foreclosure share.
B) ΔINT does not have unit root.
C) ΔINT has unit root and is cointegrated with foreclosure share.
Suppose that the following time-series model is found to have a unit root:
The table below shows the autocorrelations of the lagged residuals for the first differences of
the natural logarithm of quarterly motorcycle sales that were fit to the AR(1) model: (ln salest −
ln salest − 1) = b0 + b1(ln salest − 1 − ln salest − 2) + εt. The critical t-statistic at 5% significance is
2.0, which means that there is significant autocorrelation for the lag-4 residual, indicating the
presence of seasonality. Assuming the time series is covariance stationary, which of the
following models is most likely to CORRECT for this apparent seasonality?
David Brice, CFA, has tried to use an AR(1) model to predict a given exchange rate. Brice has
concluded the exchange rate follows a random walk without a drift. The current value of the
exchange rate is 2.2. Under these conditions, which of the following would be least likely?
Troy Dillard, CFA, has estimated the following equation using semiannual data: xt = 44 + 0.1×xt–
1 – 0.25×xt– 2 - 0.15×xt– 3 + et. Given the data in the table below, what is Dillard's best forecast
Time Value
2003: I 31
2003: II 31
2004: I 33
2004: II 33
2005: I 36
2005: II 35
2006: I 32
2006: II 33
A) 33.74.
B) 34.05.
C) 34.36.
Question #86 of 93 Question ID: 1472152
Given an AR(1) process represented by xt+1 = b0 + b1×xt + et, the process would not be a
random walk if:
A) E(et)=0.
C) b1 = 1.
Bert Smithers, CFA, is a sell-side analyst who has been asked to look at the luxury car sector. He
has hypothesized that sales of luxury cars have grown at a constant rate over the past 15 years.
Exhibit 1
b0 0.4563
b1 0.6874
R-squared 0.7548
Durbin-Watson 1.23
F 12.63
Observations 15
After discussing the above matter with a colleague, Bert finally decides to use an annual
autoregressive model of Order One [i.e., AR(1)]. Using the data in Exhibit 1, calculate the mean
reverting level of the series.
A) 1.46.
B) 1.26.
C) 1.66.
Bert is aware that the Dickey Fuller test can be used to discover whether a model has a unit
root. He is also aware that the test would use a revised set of critical t-values. What would it
mean to Bert to reject the null of the Dickey Fuller test (Ho: g = 0)?
When using the root mean squared error (RMSE) criterion to evaluate the predictive power of
the model, which of the following is the most appropriate statement?
A) Use the model with the lowest RMSE calculated using the out-of-sample data.
B) Use the model with the lowest RMSE calculated using the in-sample data.
C) Use the model with the highest RMSE calculated using the in-sample data.
Bert would like to use his AR(1) model to forecast future sales of luxury automobiles. What is
the annualized growth rate between today and 20X3?
A) 10%.
B) 12%.
C) 11%.
Which of the following statements regarding a mean reverting time series is least accurate?
If the current value of the time series is above the mean reverting level, the prediction
A)
is that the time series will increase.
B) If the time-series variable is x, then xt = b0 + b1xt-1.
If the current value of the time series is above the mean reverting level, the prediction
C)
is that the time series will decrease.