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Problem Set_Chapter 4

The document outlines a series of exercises using various datasets to analyze house pricing, executive compensation, import data, and stock returns through regression analysis. Each exercise involves creating plots, performing regressions, and discussing the relationships and significance of explanatory variables. The exercises also address issues such as multicollinearity and the impact of omitted variables on regression results.

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Tuan Anh Tran
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3 views

Problem Set_Chapter 4

The document outlines a series of exercises using various datasets to analyze house pricing, executive compensation, import data, and stock returns through regression analysis. Each exercise involves creating plots, performing regressions, and discussing the relationships and significance of explanatory variables. The exercises also address issues such as multicollinearity and the impact of omitted variables on regression results.

Uploaded by

Tuan Anh Tran
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Exercise 1

Using Data set HPRICE.XLS


(a) Create XY-plots using the four explanatory variables in the house pricing
example one at a time (i.e. plot Y and X1, then plot Y and X2, etc.).
(b) Perform simple regressions using the explanatory variables one at a time (i.e.
regress Y on X1, then regress Y on X2, etc.).
(c) Comment on the relationships you find in (a) and (b)
Exercise 2
Use data set HPRICE.XLS and let Y = house price be the dependent variable and
consider the following potential explanatory variables:
• X1 = the lot size of the property (in square feet)
• X2 = the number of bedrooms
• X3 = the number of bathrooms
• X4 = the number of storeys (excluding the basement).
(a) Regress Y on X1, X2, X3 and X4 (i.e. recreate the example) and discuss your
results.
(b) Regress Y on various subsets of X1, X2, X3 and X4 and discuss your results.
(c) Comparing your results for (a) and (b), examine the effect of omitting
explanatory variables.
Exercise 3
For this question, use data set EXECUTIVE.XLS with Y = executive
compensation, X = profits, W = change in sales and Z = change in debt. Carry out a
multiple regression analysis of this data set addressing the issues raised in this
chapter. For instance, you may want to:
(a) Regress Y on X1, X2 and X3 and verbally interpret the coefficient estimates you
obtain.
(b) Discuss the statistical significance of the coefficients. Are there explanatory
variables that can be dropped?
(c) Discuss the fit of the regression.
(d) Calculate a correlation matrix. Through consideration of this and regression
results, discuss the issue of multicollinearity
Exercise 4
The file imports_uk_y.xls contains yearly data (1972–1997) for real imports
(IMP), real gross domestic product (GDP) and the relative consumer price index
(CPI) of domestic to foreign prices for the US economy. Use these data to estimate
the following model: ln(IMP)t = β1 + β2 ln(GDP)t + β3 ln(CPI)t + ut
a. Check whether there is multicollinearity in the data.
b. Also, run the following additional regressions:
ln(IMP)t = β1 + β2 ln(GDP)t + ut
ln(IMP)t = β1 + β2 ln(CPI)t + ut
ln(GDP)t = β1 + β2 ln(CPI)t + ut
What can you conclude about the nature of multicollinearity from these results?
Exercise 5
The file imports_uk.xls contains quarterly observations of the variables mentioned
in Exercise 4. Repeat Exercise 4 using the quarterly (higher frequency) data. Do
your results change?
Exercise 6
Use the data in the file money_uk02.xls to estimate the parameters α, β and γ in the
equation below:
ln(M/P)t = a + β ln(Yt) + γ (R1t) + ut
where R1t is the three-month treasury bill rate. For the rest of the variables the
usual notation applies.
(a) Use as an additional variable in the above equation R2t, which is the dollar
interest rate.
(b) Do you expect to find multicollinearity? Why?
(c) Calculate the correlation matrix of all the variables. Which correlation
coefficient is the largest?
Exercise 7
In the spirit of arbitrage pricing theory (APT), the following exercise will examine
regressions that seek to determine whether the monthly returns on Microsoft stock
can be explained by reference to unexpected changes in a set of macroeconomic
and financial variables.
There are 326 monthly observations in the file ‘macro.xls’, starting in March 1986
and ending in March 2018.
The series in the Excel file are the Microsoft stock price, the S&P500 index value,
the consumer price index, an industrial production index, Treasury bill yields for
the following maturities: three months and ten years, a measure of ‘narrow’ money
supply, a consumer credit series, and a ‘credit spread’ series. The latter is defined
as the difference in annualised average yields between a portfolio of bonds rated
AAA and a portfolio of bonds rated BAA.
a. The first stage is to generate a set of changes or differences for each of the
variables, since the APT posits that the stock returns can be explained by reference
to the unexpected changes in the macroeconomic variables rather than their levels.
The unexpected value of a variable can be defined as the difference between the
actual (realised) value of the variable and its expected value. The question then
arises about how we believe that investors might have formed their expectations,
and while there are many ways to construct measures of expectations, the easiest is
to assume that investors have naive expectations that the next period value of the
variable is equal to the current value. This being the case, the entire change in the
variable from one period to the next is the unexpected change (because investors
are assumed to expect no change).
[Hints: dcredit = d(ccredit), dprod = d(indpro), rmsoft = 100*dlog(microsoft),
rsandp = 100*dlog(sandp), dmoney = d(m1supply), inflation = 100*dlog(cpi),
term = ustb10y - ustb3m]
Further transformations to some of the transformed series:
dinflation = d(inflation), mustb3m=ustb3m/12, rterm = d(term),
ermsoft=rmsoft-mustb3m, ersandp=rsandp-mustb3m
Run the regression:
ermsoft c ersandp dprod dcredit dinflation dmoney spread rterm
Which of the variables has a statistically significant impact on the Microsoft excess
returns? Using your knowledge of the effects of the financial and macroeconomic
environment on stock returns, examine whether the coefficients have their
expected signs and whether the sizes of the parameters are plausible.

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