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 DRET,= both DRETMG +b2 DRETMC1-1+Eq Where t stands for day t The empirical results are given as follows: Variable Coefficient Std. Error t-Statistic Prob. -3.45E-05 0.000486 -0.070863 0.9436 0.417932 0.023721 17.61868 0.0000 0.068405 0.022833 -2.995936 0.0030 DRETMC(-1) R-squared F-statistic Prob(F-statistic) 0.578675 Mean dependent var 64.8158 Durbin-Watson stat 0.000000 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-0003, respectively. How much is the return of tomorrow?

Explanation / Answer

a)

DRET_t = 0.417932 – 0.0000345*DRETMC_t - 0.068405*DRETMC_(t-1)

b)

Ho: model is not significant

H1: model is significant

With F = 164.8158 and p-value < 0.05, I reject ho and conclude that model is significant

c)

t DRETMC_t DRETMC_(t-1) DRET_t today 0.0017 -0.003 =0.417932-0.0000345*0.0017-0.068405*(-0.003) =0.418137156 tomorrow 0.4181372 0.0017 =0.417932-0.0000345*0.4181372-0.068405*(0.0017) =0.417801286

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