Data derived from: http://global.oup.com/booksites/content/0199268010/datasets/c

Question

Data derived from:

http://global.oup.com/booksites/content/0199268010/datasets/ch2/

Consider the excess returns data set described in Example 2.1 on stock market returns, with x_i the excess returns of the market index and y_i the excess returns in the sector of cyclical consumer goods. a. Perform two regressions of y on x, one in the model y_i = alpha + beta x_i + epsilon_i and the second in the model y_i = beta x_i + epsilon_i. b. Check the conditions (2.11) and (2.12) for both models. c. Investigate the correlation between the two series of residuals obtained in a. Can you explain this outcome?

Explanation / Answer

There are two regression model, (1) with intercept (2) without intercept

Based on the given data, we analysis the regression model by ordinary least square and given the results by Excel

(1)

Y= -0.4474+1.1711X

(2)

Y =1.155X

SUMMARY OUTPUT Regression Statistics Multiple R 0.709563 R Square 0.50348 Adjusted R Square 0.501394 Standard Error 5.542759 Observations 240 ANOVA df SS MS F Significance F Regression 1 7414.377 7414.377 241.3363 4.75E-38 Residual 238 7311.877 30.72217 Total 239 14726.25 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Intercept -0.44748 0.362943 -1.23292 0.21882 -1.16247 0.26751 X Variable 1 1.171128 0.075386 15.535 4.75E-38 1.022619 1.319638

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