aps 425 final exam – fall 2015 sample answers 12/8/2015

Final Exam - Sample Answers APS 425 - Advanced Managerial Data Analysis

(c) Prof. G. William Schwert, 2003-2015 1

APS 425Final Exam – Fall 2015

Sample Answers

12/8/2015

Instructor: G. William Schwert585-275-2470

[email protected]© G. William Schwert

Model for Stock Returns as a Function of Gold and Silver Returns

• The regression model shown in the exam is a classic spurious regression

• The independent variables are strongly autocorrelated, as are the residuals

• The Durbin-Watson is 0.01!

• So, we will estimate a model in terms of percent changes, which should fix most/all of the autocorrelation issues



Model for Stock Returns as a Function of Gold and Silver Returns

• There is no reliable relation with gold returns and the sign of the coefficients are the opposite of what the levels regression

GARCH(1,1) Model for Stock Returns

-Lots of heteroskedasticity, but the basic conclusion about the lack of relation of current stock returns with lagged gold or silver returns remains



Has Obama’s Energy Policy Affected Commodity Prices?

• Looks like plots of corn, soybean, and beef prices rose quite a bit in the early years of the Obama administration

• Oil prices fell, rose, and fell


Corn and soybeans behave more like oil in the Obama yearsSurprising that beef prices seem to have changed correlation with

soybeans and corn (and oil)

1968-2007 2008-2015

Correlation Correlation

t-Statistic CORN SOYBEANS OIL t-Statistic CORN SOYBEANS OIL

SOYBEANS 0.78 SOYBEANS 0.8027.01 12.76

OIL 0.39 0.38 OIL 0.58 0.699.37 8.89 6.87 9.13

BEEF 0.24 0.35 0.81 BEEF -0.15 0.06 -0.115 47 8 14 29 89 1 44 0 56 1 11




• Using an interactive dummy variable regression, it looks like the relation between beef and corn prices has become more negative and the relation between corn and oil prices has become more positive under Obama


• Using an interactive dummy variable regression, it looks like the relation between corn and soybean prices has become more negative and the relation between soybean and oil prices has become more positive under Obama




• Using an interactive dummy variable regression, it looks like the relation between beef and corn has become more negative and the relation between beef and oil prices has become more positive under Obama


• Using an interactive dummy variable regression, it looks like the relation between beef all of the other commodity prices have become more positive under Obama



Interest Rates and the Housing Market

• First thing to note is that the house price series is highly seasonal (partly as a result of the way it is constructed)

• After seasonal differencing it looks like it may need an AR(3) model


• Plotting the long-term Baa interest rate , the short-term risk-free rate, and the housing price index it looks like the period from 2002 through mid-2005 has very low short-term interest rates and fast rising housing prices




• Looks like there is close to a unit root, so I estimate a model for changes in seasonal difference


• Residuals are reasonably behaved, but with ARCH effects




• GARCH(1,1) shows persistent conditional heteroskedasticity


• After taking into account the time series behavior of housing prices, there is no evidence that low short-term interest rates have any effect on housing prices



Credit Risk and the Real Economy

• Want to see if either TED spread or (Baa-Aaa) spread help predict either the unemployment rate or the growth rate of industrial production

• Clearly IP growth and the unemployment rates are negatively correlated, and credit spreads rose a lot during the 2007-2009 period


• Want to see if either TED spread or (Baa-Aaa) spread help predict either the unemployment rate or the growth rate of industrial production

• Credit spreads rose a lot during the 2007-2009 period when IP fell and UNEMP rose

• Looks like long-term credit spread has more explanatory power

Correlation

t-Statistic DLOG(IP) UNEMP/100 TED/100

UNEMP/100 -0.01

-0.32

TED/100 0.02 -0.20

0.38 -4.76

BAA-AAA -0.25 0.47 0.11

-6.15 12.45 2.62




• It looks like the long-term Baa-Aaa credit risk helps predict future higher unemployment rates, and vice versa

• The TED spread does not seem to add much


• It looks like the long-term Baa-Aaa credit risk helps predict future lower IP growth rates, and vice versa

• The TED spread does not seem to add much



Links

Eviews answer worksheethttp://schwert.ssb.rochester.edu/a425/a425_final15a.wf1

APS 425 Home Pagehttp://schwert.ssb.rochester.edu/a425/a425main.htm

aps 425 final exam – fall 2015 sample answers 12/8/2015

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