Section 4. (20 points) With daily times data of a stock, we estimate the time se

Question

Section 4. (20 points) With daily times data of a stock, we estimate the time series models of stock return and whole stock market return are given as follows, respectively: Where t stands for day t. The empirical results are given as follows Variable Coefficient Std. Error Statistic Prob. 3.45E-05 0.000486 -0.070863 0.9436 0.417932 0.03721 17.61868 0.0000 -0.068405 0.022833 -2.995936 0.0030 DRETMC (-1) R-squared F-statistic Prob(F-statistic) 0.578675 164.8158 0.000000 Mean dependent var Durbin-Watson stat -2.35E-05 2.038764 From the above table, answer the below questions: (1) What is the final model, and give the reason why the model is that. (2) Give the reasonable explanation of the final model. (3) Suppose the today return of this stock is 0.0022, and the today and yesterday return of the whole stock market are 0.0017 and -0.003., respectively. How much is the return of tomorrow?

Explanation / Answer

1) The final model is

DRETt = 0.417932 DRETMCt - 0.068405 DRETMCt-1

Because b0 is very small as -0.00003455 so we take it as zero

2) The final model is DRETt = 0.417932 DRETMCt - 0.068405 DRETMCt-1

Decision rule:

1) If p-value < level of significance (alpha) then we reject null hypothesis

2) If p-value > level of significance (alpha) then we fail to reject null hypothesis.

Consider the p-value corresponding to intercept(or constant) b0

Here p value = 0.9436 > 0.05 so we used 2nd rule.

Because the p -value corresponding to the intercept b0 is very large and so we take b0 = 0

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