CME 1

Question 1

Business Cycle

Answer 1

Fluctuations in GDP in relation to longterm trend growth, usually 9-11 years

Question 2

Capital markets expectations

Answer 2

Risk/return prospects of asset classes

Question 3

Cross-sectional consistency

Answer 3

A feature for expectations setting that says:

Estimates for all asset classes:

(i) same underlying assumptions
(ii) key relationships maintained (e.g., strong correlations)

Internal consistency across asset classes

Question 4

Diffusion index

Answer 4

Number of up/down indicators

Question 5

Econometrics

Answer 5

Application of

(i) QUANT modeling
(ii) ECON theory analysis

to

analysis of economic DATA

Question 6

Economic indicators

Answer 6

Econ stats on:

(i) economy’s recent past activity
(ii) current or future position in business cycle

Provide by:

(i) government
(ii) established private organizations

Question 7

Intertemporal consistency

Answer 7

A feature of expectations setting

Estimates for an asset class over different horizons reflect same assumptions re potential paths of returns over time.

Internal consistency over time horizons.

Question 8

Leading indicators

Answer 8

Econ variables whose values vary w/ business cycle but at a fairly consistent time internal b/f a turn in the cycle.

Question 9

Model uncertainty

Answer 9

Ditto

Question 10

Nonstationarity

Answer 10

Series properties (µ, σ) not consistent through time

Question 11

Parameter uncertainty

Answer 11

Uncertainty arising b/c quant model’s parameters are estimated w/ error.

Question 12

Re-base

Answer 12

Changing base time period of an index

Question 13

Reduced-form models

Answer 13

Models using econ theory and other factors (e.g., prior research output) to describe hypothesized relationships.

More compact representations of underlying structural models.

Evaluate endogenous variables in terms of observable exogenous variables.

Question 14

Regime

Answer 14

Governing set of relationships (b/t variables) that stem from various environmental/policy factors:

(i) technological
(ii) political
(iii) legal
(iv) regulatory

Changes in such factors are changes in regime.

Question 15

Structural models

Answer 15

Specify functional relationships among variables based on econ theory.

The functional form and parameters of these models derived from underlying theory.

May include unobservable parameters.

Question 16

Taylor rule

Answer 16

Question 17

Total factor productivity (TFP)

Answer 17

A variable that accounts for that part of Y not directly accounted for by the levels of the production factors (K & L).

• Scale factor that reflects the portion of output growth that is not accounted for by changes in the capital and labor inputs.
• Mainly a reflection of technological change.