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This model will try to estimate the price change for an oil company given the change in various inputs that determine the value of the company’s stock. The following variables will be used: Dependent: OILSTOCK – price of the oil companies stock Independent: CRUDEOIL – the price of crude oil, we would expect the price of the stock to rise as crude oil rises in price (expected sign: +) SP500 – how the overall market performs, we would expect this stock to rise when the overall market is rising (expected sign: +) TENYEAR – change in interest rates, if interest rates go up we would expect the price of the stock to fall since it will cost more to borrow money for operations (expected sign: +) *note the sign should be positive because if interest rates go up the ETF price falls Proposed Model:

Data

Source: Yahoo! Finance Just by peering at the chart we can see that Exxon mobile and crude oil look both highly correlated with one another. Running a correlation tables confirms this, in fact almost all variables look to be highly correlated. This could possibly be a model that will be plagued by a collinearity problem. The data is recorded in price per share, ETF’s for the commodities were used to simplify any conversion factors from yields or contract sizes.

Exxon Mobile Exxon Mobile Crude Oil ETF SP500 ETF Ten Year ETF

Crude Oil ETF

SP500 ETF

Ten Year ETF

1 0.777599255 1 0.904667371 0.795545553 1 0.671997044 0.819762306 0.776714065

1

11/29/2011 160 140 120 100 80 60 40 20 0 Exxon Mobile Crude Oil ETF SP500 ETF Ten Year ETF .Outright Prices 1/1/2011 .

If there were collinearity problems in the model the t-stats would not be so high.16883919 7.113211264 0.058996178 0.965229758 9.000500935 0.19230071 383. The adjusted R squared is not very different from R-Squared due to the fact that the estimators have such high significance (low variance).91430447 R Square 0.113211264 N =230 K =3 F = (0.056532519 0.694067039 0. since the correlation table showed some very large correlations we will have to confirm that there is not extreme heteroskadacity skewing our t-stats.5769/3) / (0.835952664 Adjusted R Square 0.690113394 Standard Error 0.5769021 RSS = 0.Regression Results Regression Statistics Multiple R 0.970597721 0.58385E-43 3.8837134 0.833775044 Standard Error 0. R-Squared and adjusted R squared are both very high.000276848 All variables align with the initial fundamental model and all are significant at the 95% level.411818455 0.1132/ (230 – 3 – 1)) = 383.022381573 Observations 230 ANOVA df Regression Residual Total 3 226 229 Coefficients Intercept ln(Crude) ln(SP) ln(10yr) -1.187484255 SS MS F 0.84175E-05 17.507616171 0.050752803 t Stat P-value 3.014878376 0.9204947 . F-Test H0: CRUDE = SP = 10YR = 0 HA: H0 not true ESS = 0.57690213 0.000545362 3.40250084 0.

however the t-stats of our estimators have not been affected by this severe collinearity.317317317 0.F > F* = 383 > 2. The f-statistic is extremely large.001032255 0.095801505 The variance inflation test indicates that there is a severe amount of collinearity in the model. this will cause out estimates to high a higher variance.8359 Variance Inflation Factor: 1/ (1-0. so that will set a Z in the park test. or the SP500.004992978 1. agreeing with the fact that all of the individual estimator t-stats are significant as well.002183665 0. Violations of the Classical Assumption Multicollinearity: R-Squared = 0.8359) = 6. . If there was a collinearity problem we would be seeing such large significance in the t-statistics unless a severe amount of heteroskadacity is masking the true t-stats.6 Reject H0. I believe that the digest cause of volatility would have to be the market in general.903646148 0. perhaps there is heteroskadacity skewing the t-stats? Heteroskadacity: Guessing what variable is causing the heteroskadacity will be difficult since it is common for a security price to have changing variance over time (volatility).005003881 -0. Park Test: Coefficients 0.000932793 Standard Error t Stat P-value 0. the estimators are overall significant from zero.367136819 Intercept ln(SP) Since the SP t-stat is not significant at the 95% level the park test indicates that the model is not plagued by a heteroskadacity problem.

36 Reject H0.128343 H0: p = 0 HA: p != 0 K=3 N = 230 DL = 1. it is likely that there is heteroskadacity. *It is likely that another factor was causing the heteroskadacity city rather than the SP like I originally hypothesized.0145/0.92 Chi-stat = 61. there exists serial correlation. since the white test tests all proportionality factors.85 Since D < DL Reject H0. Serial Correlation: Durbin-Watson d Test Sum Lagged Error = 0. A possible cause of the serial correlation could be from an omitted variable.0145 Sum Error-Squared = 0.11298 = 0.2668 Df = 9 ChiCritical = 16.White Test: H0: No heteroskadacisty HA: Heteroskadactiy N = 230 R-Squared = 0.69 DU = 1.11298 D-Stat = 0. .

since demand for oil increases during the summer months. . Perhaps this could be an omitted variable that will help cure the collinearity problem.Summer August .summer November – Non – summer Another dummy variable gauging economic conditions will be added. Each month will take the following definition: January – Non summer Febuary – Non summer March – Non summer April – Non summer May . New proposed Model: + Expected sign of new Season dummy variable: + The season dummy variable should increase the share price of the oil companies stock. increasing demand for oil. During the summer vacation month’s consumers drive more and thus use more fuel. This dummy variable will be 1 if Non-Farm payrolls for the month is greater than the last and will be 0 if NFP is decreasing.Summer September – Non summer October – Non.Model Improvements To improvise the model I’ve introduced a dummy seasonality factor.Summer July .Summer June . Expected sign of new NFP dummy variable: + The Non-Farm payrolls dummy variable should be positive since an increase in economic activity should increase the demand of oil.

205593733 -0.120365363 305.89615E-06 0.869213867 Standard Error 0.08601E-54 4.15932E-09 1.51654E-10 0. Possible explanations for the mis-alignment in the seasonal variables sign could be due to the size of the sample size.227012843 3. The sample is only taken for one year.8 4.045212015 t Stat P-value 5.002978617 6.155958547 0.002720242 5.80442362 3.933846593 R Square 0. seasonality might only be observable over multiple years.716345443 1.019785033 1.404305615 0.014088837 0.2 -0.601826814 0. .014218742 5 224 229 SS MS F 0.161612888 20.019852872 Observations 230 ANOVA df Regression Residual Total Coefficients Intercept ln(Crude) ln(SP) ln(10yr) Summer NFP -2. The adjusted R-squared has increased as a results of adding the dummy variables.4 4.992853037 8.3900305 0.2 0 SUMMARY OUTPUT R 4.872069459 Adjusted R Square 0.Modified Regression Results -0.94165E-07 The summer dummy variable did not align with fundamental insight.08828658 0.2429337 0.055563113 0.690113394 Standard Error 0.5 0 N S l N S l Regression Statistics Multiple R 0. however the nonfarm payrolls number did.000394137 0.374268097 0.020005418 0.547325121 8.

60182681 RSSr = 0.57690213 N= K= K1 = Final Improved Model Conclusion Can we make money trading this model? .Restricted F-Test H0: HA: At least on β != 0 RSSu = 0.

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