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Welcome Note
In this problem set you will find some questions on data transofrmation and
bivariate linear regaression. Maybe you would like to practice with the
lecture example before starting. Hope you will enjoy the class.
Best wishes, Luigi
Problems
1. Data Transformations
1.1. Access the Eviews files named uk_imports.wf1
Refer to page 18 of the lecture notes in calculating data in real terms:
o Compare the real with the nominal series.
o Do a line graph of nominal and real GDP. Which one has a smaller trend?
o Do a scatter diagram and find the correlation coefficient between real GDP and
real Imports, and Real Imports and Real Import Prices. Compare this with the
nominal series’ pair wise correlations.
o Comment on the results.
o Compare the two ways of calculating the annual growth rate of GDP.
o Graph both the first difference and the growth rate of GDP.
o Comment on the patterns.
1
We will start with a simple Bivariate Regression using the hypothetical cross- sectional
data for the income and consumption expenditure of 25 Households. (EViews Workfile
cs1.wf1 saved from last week).
Click on Quick, Estimate Equation and in the box that appears write:
cons c inc
Or
cons=c(1)+c(2)*inc
2
We test it empirically using the Single Index Mode.
So Let M = the market index (for example, S&P 500)
𝑅𝑚 = 𝑟𝑚 − 𝑟𝑓 = excess return of the market portfolio (the index)
𝑅𝑖 = 𝑟𝑖 − 𝑟𝑓 = excess return of a security
Using historical data we can regress the excess return of a security (𝑅𝑖 = 𝑟𝑀 − 𝑟𝑓 ) on the
excess return of the index:
Ri t i i RM t ei t
𝛼𝑖 is the stock expected excess return when the market excess return is zero.
𝛽𝑖 is the security sensitivity to the index.
𝑒𝑖 is the zero-mean firm specific surprise.