Financial Econometrics I, MFIN 701 Assignment 2
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Financial Econometrics I, MFIN 701
Assignment 2
Due March 17, 2022, 5pm
Hand in a copy of your computer output and a separate write-up of the an- swers to Avenue Assignment 2 to the following questions. Writing answers on your computer output is not acceptable. Each student’s write-up should be done independently.
This assignment will explore prediction of monthly returns given various predictor variables. The dataset is gw2020-n.dat and the column CRSP SPvw we will use as monthly returns rt . The remaining columns (except CRSP SPvwx) list regressors available at time t. Scale all data by 12 to put it into annual terms.
1. Consider the following model to predict rt
rt = Xt−1 β + ✏t , ✏t ⇠ iid(0, σ 2 ), (1)
where Xt−1 consists of the regressors: tbl,lty,Rfree,infl,ltr,svar along with rt−1 . Note the lag t − 1 on the regressors. Answer the following questions.
(a) Estimate the model by OLS and report estimates. Be sure to consider mispecification issues such as heteroskedasticity and au- tocorrelation in the errors. Report your final valid model and dis- cuss any changes or corrections you made to make the estimates valid.
(b) To what extent are monthly returns predictable by these regres- sors? What regressors are significant?
(c) Use an F-test to remove any insignificant regressors. What is your final model? (Always include at least an intercept in the model). Are there any concerns you have with this model?
(d) Consider the time span of the dataset and select a period that could undergo a structural break. Explain why you picked this period. Design a model for a structural break and test for its presence in a model with regressors rt−1 ,ltr and svar along with an intercept. What are your conclusions?
2023-03-15