Questions -

Q1. Use the data file FTDATA-EXERCISE, containing 252 daily observations and the company return allocated to you, mrpi the market return and the monthly dummy variables.

The 'market model' of asset returns states that

R_1t = α + βR_mt + u_t

where: R_1t = return (including capital gains and dividends) to shareholders of the 1'th asset at time t. R_mt = MRPI = equivalent return on the 'market portfolio' of assets at time t. α = a constant.

Data window

Figure 1.

(a) How to make the group: Click on object than new object: you can find new window shows different icons. Click on the group than on new window right the name of the variables start with independent variable. Click OK, see spread sheet with two variables. In group spread sheet Click on View, Graph and then scatter.

(b) For more confirmation add the regression line: on the scatter graph window click on Options than fit in line options on right hand corner.

(c) Test of equality between MRPI and R1.

(d) Compute the correlation matrix between MRPI and R1.

Q2. (a) Estimate the market model with OLS. Go to Quick than click on option Estimate Equation: Open new window right the command (r1 c mrpi).

(b) Using a t-test and a 5% level of statistical significance, are the individual estimated effects, other than the constant term, each statistically significant from zero.

Q3. Considers the situation where an investor wishes to hedge a long position in the S&P500 using a short position in future constracts. The dependent variable is a time series of spot returns and the independent variable is time series of future returns.

SR_t = α + βSR_t + u_t

Use the data file SandPhedge.xls, which contains monthly returns for the S&P500 index and S&P500 futures. The start date is 2002:2 and the end date is 2013:04.

a. Import the Excel file to EViews.

b. The first step in the analysis is to transform the levels of the two series into percentage returns. Generate the returns variables.

c. Compute the summary statistics for spot and futures.

d. Estimate the market model with OLS. Go to Quick than click on option Estimate Equation: Open new window right the command (rspot c rfutures).

e. Estimate the market model with OLS. Go to Quick than click on option Estimate Equation: Open new window right the command (spot c futures).