Question

SECTION B Question 1 The quarterly French dividend-yields and share prices data over the period January 1988 to December 2007 are plotted in Figure 1. Data for share prices are expressed in logarithms Dividend-yields Share prices Figure 1. Dividend-yields and share prices data, 1988-2007 a) Carefully explain if the series of dividend-yields and share prices appears to be nonstationary. 130) b) Suggest a unit root test for the nonstationarity of dividend yields and share prices series regardless of your answer in part a). Clearly explain the null and the alternative hypotheses of the suggested test. Also explain how you can establish the presence of nonstationarity in the series using the suggested test. [40] c) Suppose that at least one of the two series of dividend yields and share price data is nonstationary. Carefully explain the procedure to make this series stationary 130]

Answer 1

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