IB93F0 Research Methodology – Individual Assignment 1
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IB93F0 Research Methodology – Individual Assignment 1
MSc Finance
MSc Finance and Economics
Submission deadline: 13th March 2023
Students must do all the questions in Parts 1 to 3 using the MATLAB. Any other computer software package (e.g., STATA, MS Excel, etc.) will NOT be accepted. Students must submit the answer, the MATLAB script (‘.m file’), and the used dataset so the marker can run submitted codes to check with written answers. The name of submitted ‘.mfile’ must be a 7-digit student ID (e.g., ‘1234567.m’).
IMPORTANT: Students must not share their MATALB codes. Plagiarism will be seriously dealt with when the answers and scripts are marked, and will give ZERO mark.
Marking Criteria: Marking will be based on the overall quality/accuracy ofwritten answers and
MATAB codes: 70+ (distinction), 60+ (merit), 50+ (pass), and 50− (fail)
Word Limit: 500 words (excluding references, tables, figures, and equations)
Part 1. Asset Pricing Methodology
Objective: Compute the average return and Fama-French alphas of book-to-market (BTM) portfolios.
Data to Download:
(1) Stock prices, returns, and the number of shares outstanding from the CRSP database
(2) Book value of equity from the CRSP/Compustat Merged (CCM) database
(3) Fama-French three factors from the CRSP database
MATLAB Task:
1. Construct BTM quintile portfolios.
Choose any 20 stocks on your discretion for the five year’s period: July 2005 to June
2010
Construct book-to-market quintile portfolios (portfolios 1 to 5) by sorting stocks at
the end of June of each year based on the BTM ratio.
2. Calculate the monthly returns of BTM quintile portfolios and a long-short portfolio.
Report the average return and its t-statistics
Report the FF3 alpha and its t-statistics
Expected Output:
1. Present the table of portfolio returns and alphas in the form as below:
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PF 1 (Low) |
PF 2 |
PF 3 |
PF 4 |
PF 5 (High) |
PF 5 – PF1 |
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Avg Return |
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t-statistics |
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FF3 Alpha |
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t-statistics |
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2. Explain whether your results in Problem 1 are consistent with the existence of value premium.
Part 2. Event Study Methodology
Objective: Compute the cumulative average abnormal returns (CAAR) around the S&P 500 index addition/exclusion.
Data to Download:
(1) Stock returns from the CRSP database
(2) Fama-French three factors from the CRSP database
MATLAB Task:
1. Compute the CAAR of the added firm for the 5 days before- and 5 days after the addition.
Consider the following firms among others that were newly added to the market index
on 20/12/2010:
|
Company Name |
Ticker |
PERMNO |
Addition Date |
|
Netflix |
NFLX |
89393 |
20/12/2010 |
|
Cablevision |
CVC |
68857 |
20/12/2010 |
|
F5 Networks |
FFIV |
86964 |
20/12/2010 |
2. Compute the CAAR of the excluded firm for the 5 days before- and 5 days after the exclusion.
Consider the following firms among others that were excluded from the market index
on 20/12/2010:
|
Company Name |
Ticker |
PERMNO |
Exclusion Date |
|
New York Times |
NYT |
47466 |
20/12/2010 |
|
Eastman Kodak |
EK |
11754 |
20/12/2010 |
|
Office Depot |
ODP |
75573 |
20/12/2010 |
Expected Output:
1. Present the table of the CAAR for (−5, 5) in the form as below:
|
Index Addition |
Index Exclusion |
||
|
CAAR for (−5, 5) |
t-Statistics |
CAAR for (−5, 5) |
t-Statistics |
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2. Plot the graph of the CAAR for (−5, 5) for the index addition/exclusion: x-axis for days from -5 to +5, and y-axis for CAARs.
3. Interpret your results in Problems 1 and 2 to see whether economic values are created by the market index addition/exclusion.
Part 3. Panel Data Methodology
Objective: Estimate the effect of AFDC benefit levels on birth rates.
Data:
The provided data set contains information on the level of AFDC benefit in each of the United States from 1970 to 1996 (excluding 1995), as well as information on birth rates at the same level from 1973 to 1992. AFDC is the acronym for the Aid to Families with Dependent Children program, which was the cash transfer program for single mothers (and, in some states, two parent families with both parents out of work) from the 1930s to the mid- 1990s. A large literature examines the effect of AFDC benefit levels on various outcomes such as birth rates, out-of-wedlock birth rates, marriage rates, divorce rates and so on.
Variable Definitions
FIPS = Federal Information Processing System = variable indicating the state. These
values are called “FIPS codes” .
YEAR = The last two digits of the calendar year corresponding to the observation. 
LAFDC = The natural log of real monthly AFDC benefits for a family of four with
no other income deflated using the CPIU, base period 1982- 1984.
LWB2024 = The natural log of the birth rate for white women ages 20-24 in a given
state and year. Births occurring in the first nine months of a given calendar year are attributed to the previous calendar year.
MATLAB Tasks and Expected Output
1. Estimate a simple OLS linear regression of the log of the birth rate on the log of real AFDC benefit levels ignoring the panel nature of the data. Interpret the resulting estimates. For a state with the mean benefit level in 1980, how much would a $100 per month increase in benefit levels change the birth rate? Is this effect plausible in light of the simple economics of the problem?
2. Describe and interpret the assumptions required for the estimates from the previous question to have a causal interpretation.
3. Estimate the fixed effects model using dummy variables for states. Interpret your results and compare them to the results from Problem 1.
4. Estimate the fixed effects model using dummy variables for states and years. Interpret your results and compare them to the results from Problem 3.
2023-03-11