Reference no: EM131940663

Assignment - Econometric Methods

The company is The boeing compay (BA), and the time period to be used would be 01/1968 to 12/1987.

Suppose you are a quantitative equity analyst working for an investment bank based in New York. Your team manager is responsible for the local US equity portfolio performance. There are ten NYSE equity securities with significant holdings in your investment bank's portfolio. Your manager has given you the assignment to analyse the historical performance of one of these ten blue-chip stocks. You need to utilise few of the most prominent empirical asset pricing models - the three-factor Fama-French model (Fama and French, 1993); and a newly- developed empirical asset model by Fama and French five-factor (Fama and French, 2015).

Your manager has asked that each team member is to compare the historical performance of the assigned to you particular blue-chip stock by using regression analysis. The period is set to 20 in a random way which will be defined below. Historical time series of closing prices end-of-the-month prices of your stock, excess market returns and popular risk factors data for the period from January 1964 to December 2017 are provided to you. The data are saved in the Excel spreadsheet titled 'FIN5EME-SEM1-2018_Assignment_1_DATA' on the subject's LMS portal.

The first sheet of this Excel spreadsheet is titled NYSE Stock Prices'. It contains historical monthly closing prices for ten blue cheap stocks listed on the NYSE. You are assigned to a particular blue-chip stock based on the last digit of your student ID number. For example, if the last digit of your ID is '1', you should use the Caterpillar Inc. (CAT) stock data series '1' which is in column C.

The second sheet of the Excel spreadsheet is titled 'Market Index_Factors_RF Rate'. It contains the market index data, Fama-French five risk factors and, the risk-free rate. More specifically these are:

1) Excess return on the market (Rm-Rf) risk factor;

2) Small Minus Big (SMB) risk factor;

3) High Minus Low (HML) risk factor;

4) Robust Minus Weak (RMW) risk factor;

5) Conservative Minus Aggressive (CMA) risk factor; plus

6) The risk-free (RF) rate measured as the 1-month US T-Bill return.

Recall that for your assignment you have to consider 240 months (20 years) of data. The full data set of 648 observations is split into ten-time sub-periods. You are assigned to a particular sub-period which corresponds to the second-last digit of your student ID number. For example, if your second last digit is '3', you should perform an empirical analysis from January 1976 (01/1976) till December 1995 (12/1995), that is, the data segment for the period of 240 monthly observations is set in column 'E' and starts from row 147 and finishes at row 386. In a report, you should provide concise and relevant answers to all questions in Part A and Part B below and the corresponding Excel and Eviews outputs. This report does not need to follow a formal report format.

In conducting statistical tests throughout, state all relevant information, such as the null and alternative hypotheses, the distribution used, the level of significance and the decision rule (critical value or p-value).

Part A - Perform the following activities:

1) Using data for your sub-period calculate and report in a table (Table 1) the descriptive statistics (mean, median, standard deviation, skewness, kurtosis, minimum and maximum) for both the price levels and price returns (relative prices) using logarithmic returns of your selected NYSE stock. Briefly comment on the results.

2) Provide separate time series plots of each variable to present: (i) price levels; (ii) returns; (iii) squared returns. Briefly comment on the results.

(Hint: The squared return time series is used to indicate a price volatility time series).

3) Test for normality for the excess return series of your NYSE stock and the market (Hint: Test whether the excess return data are normally distributed.) Comment on the results.

Part B -

4) Estimate Fama-French's three-factor empirical asset pricing model (Fama and French, 1993) using the market excess return (Rm-Rf), SMB and HML factors. Report the estimation output in a table (Table 2). Test the individual significance of the slopes of the estimated risk factors (Hint: a hypothesis test of the null that the estimate is equal to zero ('0')). Test the joint significance of the slopes of the estimated risk factors (Hint: perform a test of the null hypothesis that each of the three slope estimates is jointly equal to zero ('0')). Comment on the results.

5) Estimate the five-factor Fama-French (the full model) and the three-factor Fama-French empirical asset pricing models. Report the estimation output of the five-factor model in a table (Table 3). Compare the statistical significance of these two empirical asset pricing models. (Hint: perform statistical testing of the unrestricted model the (full) five-factor Fama-French model and the restricted three-factor Fama-French model.) Comment on the results.

You are expected to prepare and submit three separate files with clear identification of your name and student ID in the file name:

1) An Excel file containing your assigned data and variable calculations.

2) An Eviews file containing all estimated descriptive statistics and models.

3) A written report not exceeding 1,000 words of your results from Part (A) and Part (B). (Hint: Save all files with thefile name: "Ass1_FirstName_ID.***")

References:

Fama, E.F. and French, K.R., 1993. Common risk factors in the returns on stocks and bonds, Journal of Financial Economics 33, 3- 56.

Fama, E.F. and French, K.R., 2015, A five-factor asset pricing model, Journal of Financial Economics 116, 1- 22.

Attachment:- Assignment Files.rar