Statistical Analysis in Finance Class

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Questions and Answers

What is the effect of event clustering on t-tests?

It makes the t-test unnecessary.

It does not affect the t-test at all.

It increases the power of the t-test.

It induces cross-sectional correlation, making the t-test invalid. (correct)

What is one way to handle cross-sectional dependence according to Brown and Warner?

Employ the paired t-test technique.

Ignore the event clustering entirely.

Apply the crude dependence adjustment method. (correct)

Use a larger sample size to ensure normality.

In small samples (N < 30), what is recommended instead of a t-test due to non-normality of returns?

Use a Z-test for more accurate results.

Increase sample size above 30.

Utilize rank or sign tests. (correct)

Apply bootstrapping methods.

What happens to the variance of the average abnormal returns in the presence of positive correlation among returns?

It is underestimated by the usual variance estimator. Signup and view all the answers

What characterizes the distribution of returns that can complicate analyses in small samples?

Skewness and outliers. Signup and view all the answers

What is the primary focus of the Fixed Effects Model in panel data analysis?

Control for unobserved heterogeneity across entities. Signup and view all the answers

Which method is commonly used to adjust standard errors for serial correlation in time-series data?

Newey-West HAC Standard Errors Signup and view all the answers

In the context of time-series models, what does the Autocorrelation Function measure?

The relationship between a time series and its lagged values. Signup and view all the answers

What is the essential assumption for the AR(p) model to be stationary?

The mean and variance must be constant over time. Signup and view all the answers

Which of the following best describes the purpose of the Fama-MacBeth procedure in asset returns?

To compute average risk premiums across different periods. Signup and view all the answers

What challenge does measurement error in variables present in regression analysis?

It causes bias in the estimation of relationships. Signup and view all the answers

What does a VAR model account for that distinguishes it from univariate time series models?

The relationships among multiple time series variables. Signup and view all the answers

How are lagged effects integrated into time-series models?

Through autoregressive components. Signup and view all the answers

Which model is often used as a benchmark to generate normal returns in long-horizon event studies?

Fama-French Three Factor Model Signup and view all the answers

What does SMB stand for in the context of the Fama-French three factor model?

Small minus Big Signup and view all the answers

What effect does the omission of size and value factors have on abnormal returns?

Causes higher cross-sectional correlation Signup and view all the answers

Which of the following is a factor that the Fama-French model incorporates?

Value Factor Signup and view all the answers

In the Fama-French three factor model, what does HML signify?

High minus Low Signup and view all the answers

What is one downside of using the CAPM in long-horizon event studies?

Less accurate abnormal return estimates for small firms Signup and view all the answers

Which approach does Barber and Lyon (1997) suggest as an alternative to the Fama-French three factor model?

Non-Parametric Approach Signup and view all the answers

What is a disadvantage of the non-parametric approach advocated by Barber and Lyon compared to the Fama-French model?

Has lower power with the same data Signup and view all the answers

What does the intercept αp in the regression measure?

The abnormal performance relative to the three factor benchmark Signup and view all the answers

Which estimation method allows for constant terms that can vary across individual firms?

Fixed effects estimator Signup and view all the answers

What is a key advantage of the calendar time returns approach?

It avoids issues with cross-sectional and serial correlation Signup and view all the answers

In the context of panel data, what does yit typically represent?

The stock return of firm i in year t Signup and view all the answers

Which estimation method is characterized by constant and slope coefficients that vary over time?

Fama-MacBeth estimator Signup and view all the answers

If there is a month with no IPOs, what is the portfolio return set to be?

The risk-free return Signup and view all the answers

What is a limitation when there is little time variation in panel data variables?

The results can only be interpreted cross-sectionally Signup and view all the answers

Which of the following estimation methods is the simplest to use with panel data?

Pooled OLS Signup and view all the answers

What is the formula to estimate the standard deviation of the abnormal returns in period t?

$s_t = \sqrt{\frac{1}{N-1} \sum_{i=1}^{N} (AR_{it} - AAR_{t})^2}$ Signup and view all the answers

Under which conditions does TS1 approximately follow a Standard Normal distribution according to the Central Limit Theorem?

Abnormal returns must be independent and have the same mean and variance. Signup and view all the answers

What distribution does the test statistic TS1 follow when the normality assumption is violated?

T-distribution with N - 1 degrees of freedom Signup and view all the answers

Which of the following sample sizes is typically sufficient for t-tests in event studies?

N > 30 Signup and view all the answers

What critical value corresponds to a two-sided significance level of 5%?

1.96 Signup and view all the answers

What does the T S1 test statistic measure in the context of event studies?

The average abnormal return scaled by standard deviation Signup and view all the answers

If stock returns do not satisfy the Normality assumption, what implication does this have for the TS1 test statistic?

The small sample distribution result for TS1 becomes unreliable. Signup and view all the answers

What occurs to the behavior of TS1 in large samples due to the Central Limit Theorem?

It approaches a Standard Normal distribution. Signup and view all the answers

What can lead to biased OLS estimates in regression analysis?

Measurement error in one or more explanatory variables Signup and view all the answers

In the equation $x̃t = xt + νt$, what does $νt$ represent?

A random error independent of both $xt$ and $ut$ Signup and view all the answers

How does measurement error in $xt$ affect the regression model?

It leads to inconsistent parameter estimation. Signup and view all the answers

Which of the following statements is true regarding covariance in the context of measurement error?

Covariance between the composite error term and $x̃t$ increases with measurement error. Signup and view all the answers

What is the primary issue with using estimated macroeconomic variables in regression models?

They are subject to measurement errors. Signup and view all the answers

In the equation $yt = β1 + β2 x̃t + (ut - β2 νt)$, what does the term $(ut - β2 νt)$ represent?

The adjusted error term accounting for measurement error Signup and view all the answers

What is the implication of a correlated noise ($νt$) with the composite error term in a regression model?

It creates bias and inconsistency in estimates. Signup and view all the answers

Which variable is considered the true value in the measurement error model?

$x_t$ Signup and view all the answers

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Study Notes

EMF Part 2: Tilburg (Oct-Dec 2023)

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Provides a detailed outline of the content, including sections on event studies, panel data, time-series data, and non-stationarity/time-varying volatility.
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Description

This quiz explores key concepts in statistical analysis as applied to finance, including event clustering effects on t-tests, handling cross-sectional dependence, and the characteristics of small sample distributions. Focus on important statistical methods such as Fixed Effects Models and Fama-MacBeth procedures in the context of time-series data.