ETF5930 Financial Econometrics

Week 6 Tutorial

When answering the following question, you may …nd the following information useful:
the t-test
^j
j
t=
Std:Error
for j = 0; 1; 2; :::; and z0:025 = 1:96 and z0:05 = 1:645: When performing a hypothesis
test, use = 0:05:

Question 1
Reall the following question from last week’s tutorial. An auctioneer of semi-antique
and antique Persian rugs kept records of his weekly auctions in order to determine
the relationships among price, age of carpet or rug, number of people attending the
auction, and number of times the winning bidder had previously attended his auctions.
He felt that with this information, he could plan his auctions better, serve his steady
customers better and make a higher pro…t overall for himself. The data are stored in
the EViews work…le auctions.wf1. Some of these data are shown below.

Price ($) Age Audience Size Previous Attendance

y x1 x2 x3
1080 80 40 1
2540 150 80 12
... ... ... ...

... ... ... ...

2140 115 95 5

Recall the multiple linear regression model is

pricei = 0 + 1 Agei + 2 Sizei + 3 Attendancei + ei :

and the EViews output is

1
(a) Is the estimated coe¢ cient for the age statistically signi…cant? Test this by using
the EViews output and the p-value approach.

(b) Test to determine whether price is linearly related to each of age, audience size
and previous attendance by using the p-value approach.

Question 2
The dataset capm_ibm.wf1 contains monthly returns (in percentages) on IBM from
January 1991 to December 2003. The dataset also contains the following variables.

MKT: return on a value-weighted market portfolio

RF: risk-free rate for the 3-month U.S. Treasury Bill rate.

Consider the CAPM as a regression model

rjt rf t = 0 + 1 (rmt rf t ) + et

where rjt is the monthly return on IBM; rf t is the risk-free rate and rmt is the monthly
return on a value-weighted market portfolio.

(a) Estimate the CAPM regression.

(b) Based on the regression result in part (a), test the restriction 0 = 0 using the
EViews output. Provide an interpretation of the CAPM if the restriction 0 = 0
is valid. Use the critical value approach.

2
(c) Based on the regression result in part (a), using EViews, test the restriction
1 = 1: Provide an interpretation of the CAPM if the restriction 1 = 1 is
valid. Use the p-value approach.

Question 3
Recall the following question from an earlier tutorial. The dataset multi_capm.wf1
contains monthly returns, rjt (in percentages), to 10 United States industry portfolios
for the period January 1927 to December 2013. The industry portfolios are: consumer
nondurables (ind1), consumer durables (ind2), manufacturing (ind3), energy (ind4),
technology (ind5), telecommunications (ind6), wholesale and retail (ind7), healthcare
(ind8), utilities (ind9) and a catch-all that includes mining, construction, entertain-
ment and …nance (ind10). It also includes the following variables:

EMKT: excess return on a value-weighted market portfolio

SMB: measures the ‘Size’factor
HML: measures the ‘Value’factor
MOM: measures the momentum factor
RF: risk-free rate as the 1-month U.S. Treasury Bill rate.

Consider the FF3F CAPM regression

rjt rf t = 0 + 1 (rmt rf t ) + 2 SM Bt + 3 HM Lt + et

(a) Perform a joint test of the size (SMB) and value (HML) risk factors do not
explain movements in the excess returns of consumer durables portfolio.

Consider the multi-factor CAPM regression

rjt rf t = 0 + 1 (rmt rf t ) + 2 SM Bt + 3 HM Lt + 4 M OMt + et

(b) Test the hypothesis that the coe¢ cients for the three factors, SMB, HLM and
MOM, are jointly equal to zero for the consumer durables portfolio.