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# RA NO 2009... 2021BE314-5-SP- Financial Modelling #! # Times New... v 11 A A Aan A A A Alcd wir AaBb CcDa LE AaRbCelldAaBCD 154 GA Asbe ATA BU X X IFS a) A researcher investigating the factors determining wages estimates models (1) and (2) below using information on a cross-sectional sample of data on wages for 525 US workers recorded in 2005. Note that below In stands for natural logarithm and i is the subscript denoting the i- th cross-sectional unit i.e. worker InW AGE = 0.28 +0.09EDUG +0.01 EXPER: -0.03FEMALE (1) InW AGE = -1.14 +0.94InEDUC: + 0.161nEXPER -0.02FEMALE; (2) where: WAGE is the hourly wage in US$ EDUC is the number of years of education of the worker EXPER is the number of years of working experience the worker has FEMALE is a dummy variable that equals 1 if the worker is female and equals 0 if they are male. Clearly explain what the estimated values of the slope coefficients in the two models imply about the relationship between cach explanatory/independent variable and wages (you do not need to discuss the intercept constant coefficient in cach model). (20 marks) b) The researcher is unsure which of the two functional forms above is more appropriate and so applies Ramsey's RESET using the estimation results from both models. While performing the RESET tests two powers of the fitted values (i.e. P and P2) are included in the RESET regression. The values of the RESET test F-statistics are 4.71 for model (1) and 2.26 for model (2). What are the outcomes of the two RESET tests and what do these results imply about the suitability/unsuitability of the functional forms used in models (1) and (2)? Explain how you reach your conclusions. (12 marks) c) What are the likely consequences of using an incorrect functional form for a regression model? Besides the RESET tests used above, describe in detail one other possible method of testing for incorrect functional form. What advantages and/or disadvantages does this have compared to the RESET test uscd above? (1 & marke 5,0 1581 OE 161% # RA NO 2009... 2021BE314-5-SP- Financial Modelling #! # Times New... v 11 A A Aan A A A Alcd wir AaBb CcDa LE AaRbCelldAaBCD 154 GA Asbe ATA BU X X IFS a) A researcher investigating the factors determining wages estimates models (1) and (2) below using information on a cross-sectional sample of data on wages for 525 US workers recorded in 2005. Note that below In stands for natural logarithm and i is the subscript denoting the i- th cross-sectional unit i.e. worker InW AGE = 0.28 +0.09EDUG +0.01 EXPER: -0.03FEMALE (1) InW AGE = -1.14 +0.94InEDUC: + 0.161nEXPER -0.02FEMALE; (2) where: WAGE is the hourly wage in US$ EDUC is the number of years of education of the worker EXPER is the number of years of working experience the worker has FEMALE is a dummy variable that equals 1 if the worker is female and equals 0 if they are male. Clearly explain what the estimated values of the slope coefficients in the two models imply about the relationship between cach explanatory/independent variable and wages (you do not need to discuss the intercept constant coefficient in cach model). (20 marks) b) The researcher is unsure which of the two functional forms above is more appropriate and so applies Ramsey's RESET using the estimation results from both models. While performing the RESET tests two powers of the fitted values (i.e. P and P2) are included in the RESET regression. The values of the RESET test F-statistics are 4.71 for model (1) and 2.26 for model (2). What are the outcomes of the two RESET tests and what do these results imply about the suitability/unsuitability of the functional forms used in models (1) and (2)? Explain how you reach your conclusions. (12 marks) c) What are the likely consequences of using an incorrect functional form for a regression model? Besides the RESET tests used above, describe in detail one other possible method of testing for incorrect functional form. What advantages and/or disadvantages does this have compared to the RESET test uscd above? (1 & marke 5,0 1581 OE 161%

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