medium · FRM Part 1 Valuation and Risk Models
An analyst calculates a Durbin-Watson (DW) statistic of 0.85 for a time-series regression of credit spreads.
What is the most likely diagnosis and its consequence for the model's hypothesis tests?
- Negative serial correlation is present; standard errors look overstated, making the model appear too conservative.
- Multicollinearity is present; the model cannot separate the effects of the different explanatory variables.
- Heteroskedasticity is present; variance is not constant, though the standard errors stay unbiased.
- Positive serial correlation; standard errors are likely understated, and t-statistics are falsely inflated.
Sign up free to see the explanation and track your rank →
More FRM Part 1 Valuation and Risk Models practice
- If a loan has a Probability of Default (PD) of 2.0%, an Exposure at Default (EAD) of $1,00
- What is the Expected Loss (EL)?
- If market yields rise by 150 basis points (0.015), what is the estimated new price of the
- A stock trades at S_0 = $100. A European call struck at K = $100 expires in 1 year. If the
- Using a simple 'credit-triangle' approximation, what is the fair annual CDS spread in basi
- An investor holds a $10 million portfolio of two assets. Asset A has a weight of 60% and a
- If the manager scales the VaR to a 10-day horizon using the square-root-of-time rule, what
- A call option has a delta of 0.60 and a gamma of 0.05. If the underlying stock price incre