Reference no: EM131149583

Assignment Instructions

By this stage, you should have been assigned one of the nine brands of beer to analyse. Through extensive consultation with your client, you have identified 9 key items of interest. These are listed below as questions to be answered. Perform the necessary analyses and write a report explaining your findings. Potential readers include the sales and marketing divisions of your client as well as other industry professionals.

Question 1:- Construct a line chart for your given brand of beer. Comment on any features of interest.

Question 2:- Estimate a model of volume of sales using a trend component. In other words, estimate the following:

y_t=β₀+β₁T

Where y_t = Volume of sales in period t
T = Trend

Comment on your findings. I.e. what is the interpretation of the coefficient estimates? How do your findings for the trend variable compare to your observations in step 1? Are the variables statistically significant? What about the overall model fit?

Note: To complete this step, you must create a trend variable.

Question 3:- Refine the model you created in step 2 by adding a seasonal index. In other words, estimate the following:
 

y_t=β₀+β₁T+β₂SI

Where SI = Seasonal Index

Are there any months that exhibit above average sales? What do you think is the reason? How do your findings compare to your observations in step 1? You may wish to report the seasonal indices you constructed. Comment on your findings.

Note 1: To complete this step, you must create a seasonal index.
Note 2: Including the seasonal index may cause the intercept to become statistically insignificant.

However, the intercept should be retained as the line chart indicates that the data does not pass through the origin.

Question 4:- In the year 2005 and later in 2012, the outbreak of a "killer yeast strain" - Saccharomyces Cerevisiae - affecting the beer brewing process had a devastating impact. Known as ‘Gastroenteritis' , the fear of the virus quickly spread throughout the world causing people to avoid consumption of beer and yeast-related beer products. Many (not all) brands of beer use yeast in their brewing process. How do you think this yeast strain would affect the sales of your assigned brand? At the same time, certain brands of beer do not use yeast in their production. How do you think their sales will be affected?

Refine the model you created in step 3 by adding a dummy variable to represent the occurrence of ‘Gastroenteritis'. In other words, estimate the following:

y_t=β₀+β₁T+β₂SI+β₃D₁+β₄D₂

Where D₁  = Disease dummy variable for the 2003 period
And D₂  = Disease dummy variable for the 2010 period

What is the overall impact of the disease between the two periods? How do your findings compare to your observations in step 1? Comment on your findings.

Note: To complete this step, you must create dummy variables.

Question 5:- Having accounted for various time series effects, your client is now interested in how pricing affects sales. You must investigate own price effects as well as the price effects of various competitors. Use either forward or backward selection to determine which competitors are relevant. Estimate the following:

y_t=β₀+β₁T+β₂SI+β₃D₁+β₄D₂
+β₅P_t +β₆P^c_1t+β7P^c_2t +... + β_kP^c_kt

Where P_t = Own price in period t
P_kt^c = Price of the kth competitor in period t

What is the effect of increasing the price of your own brand? What about the effect from competitors? Which competitors are relevant and which ones are not? Why do you think your brand is affected by some competitors and not others?

Hint: Different brands usually compete in different categories.

Question 6:- Your client believes that sales may be affected by other savoury items and not just other brands of beer. In particular, your client believes that peanuts - a ‘must-have' accompaniment in beer drinking, may affect sales as they may be regarded as a complementary good. Investigate the impact of peanuts on sales of your brand. Estimate the following:

y_t=β₀+β₁T+β₂SI+β₃D₁+β₄D₂
+β₅P_t +β₆P^c_1t+β7P^c_2t +... + β_kP^c_kt+β₈P_t^IC

Where P_t^IC = Average price of peanuts in period t

Is your client's theory valid? Are beer and peanuts complementary goods?

Question 7:- Your client wants you to investigate the merits of different shelfing positions and their effects on sales. Currently liquor stores are charging different rents depending on the shelf position chosen.

Three(3) positions are available : lower shelf (cheaper pricing), middle shelf (premium pricing) and upper half shelf (medium pricing). To test the effects on different shelfing positions, your client has been changing shelf positions throughout the sample period. Your client now wants you to investigate empirically the merits of shelf positions, and conclude whether in fact there is a relationship between shelf position and sales. Construct the appropriate number of dummy variables and comment on your results.

Hint: You will need to decide how many dummy variables will be required and the default dummy value.

IMPORTANT: at this stage of the regression you will need to refine your regression to only include explanatory variables you deem to be important. Excel (unfortunately) will not allow you to include more than 16 variables in the regression.

Question 8:- Final Model: Now that you have done your analysis, recommend a model for your brand performance and justify your recommendation. Remember foremost your client is not an Econometrician!

Question 9:- Robustness Section: ensure your final model is robust to the assumptions underpinning the theory of Financial Modelling. Include only plots and tests you deem important and essential. You may also want to discuss the limitations of your regression and any issues related to this final model (i.e. are there other variables worth considering? Is there collinearity in your regression? etc.)

Attachment:- FINANCIAL MODELLING Assignment.rar