Introduction
In this report, I am going to interpret the ‘market model’ of asset returns, as well as analyzing the relationship between the return to shareholders and its equivalent return on the ‘market portfolio’ of assets.
The following financial model is the ‘market model’ of asset returns:
: return (including capital gains and dividends) to shareholders of the j’th asset at time t
: equivalent return on the ‘market portfolio’ of assets at time t
a: constant
ß: slope coefficient
ut: error term
Application of statistical skills to financial model is the key aspect of financial econometrics. All of the results in the report are obtained from EViews, which is useful for model-building and computing the econometric validity automatically.
The company return data R43 was allocated to me consisting of 252 daily observations, the market return MRPI and 12 monthly dummy variables.
Data Analysis
1)
Estimated Equation:
R43(t) = a + ß*MRPI(t)
From figure 1, the coefficient estimates are:
a = -0.00027073238975 ß = 0.861720311782
After substituting the coefficients:
R43(t) = -0.00027073238975 + 0.861720311782*MRPI(t)
(0.12163) (0.000678)
n = 252, R2 = 0.167204
Graph 1 - Scatter plot and regression line of the estimated equation
The scatter plot (graph 1) shows an approximately linear relationship between the explanatory variable MRPI and dependent variable R43.
The estimate of the slope coefficient is ß = 0.86172. An increase in MRPI of 1 unit is pre ...