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Tutorial 2

Applied Financial Modelling (University of Wollongong)

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Tutorial 2
Q2
“BLUE” is known as Best Linear Unbiased Estimators. Best means that the ordinary least
square estimator has minimum variance among the class of linear unbiased estimators. Linear
means that beta-hat represents a linear estimator. Unbiased means the actual value of the
alpha-hat and beta-hat would be the same as the true values. While estimator is an estimator
of the value of beta.

Q3
Unbiased means that on average the predicted value is equal to the true values. The
estimations of alpha-hat and beta-hat on the least squares are unbiased. Efficient is a beta-hat
parameter estimator of beta is said to be efficient if it is unbiased and no other unbiased
estimator has a smaller variance. If the estimator is efficient, we minimise the probability it
will be a long way off from the true value of beta. Finally, the least squares estimator alpha-
hat and beta-hat are consistent. That is, the estimates will converge to their true values as the
sample size increases to infinity.

Q4
(a) Graph
1,600
1,500
1,400
1,300
1,200
1,100
1,000
900
800
I II III IV I II III IV I II III IV I II III IV I II III IV I II III
2002 2003 2004 2005 2006 2007

Spot Futures

What can you say about the two series?

The two series move together shows that they are correlated. When spot increases, futures
also increases. However, from the graph, it shows that the red series moves first and followed
by the blue series. It is a lead lag relationship, where red series is the leading variable and the
blue series is the lagging variable.

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(b) Run a regression of spot on futures.

Dependent Variable: SPOT

Method: Least Squares
Date: 09/18/20 Time: 14:27
Sample: 2002M02 2007M07
Included observations: 66

Variable Coefficient Std. Error t-Statistic Prob.

FUTURES 0.982223 41.54289 0.0000

C 21.11071 27.71131 0.761808 0.4490

R-squared 0.964242 Mean dependent var 1159.183

Adjusted R-squared 0.963683 S.D. dependent var 177.9490
S.E. of regression 33.91163 Akaike info criterion 9.915228
Sum squared resid 73599.91 Schwarz criterion 9.981581
Log likelihood -325.2025 Hannan-Quinn criter. 9.941447
F-statistic 1725.811 Durbin-Watson stat 1.902366
Prob(F-statistic) 0.000000

Estimation of regression (results of regression):

SPOT = 21.11071 + 0.982223 FUTURES
(27.71131) (0.023644)

(c) Hypothesis test

Method 1: EViews
Hypothesis
H0 : β = 1
H1 : β ≠ 1
EViews : C(1) = 1

Wald Test:
Equation: Untitled

Test Statistic Value df Probability

t-statistic -0.751863 64 0.4549

F-statistic 0.565298 (1, 64) 0.4549
Chi-square 0.565298 1 0.4521

Null Hypothesis: C(1)=1

Null Hypothesis Summary:

Normalized Restriction (= 0) Value Std. Err.

-1 + C(1) -0.017777 0.023644

Restrictions are linear in coefficients.

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P-value (0.4549) is more than 0.05 (5% level of significance).

Do not reject H0
Conclusion, β = 1. Yes, futures price of an underlying asset and its spot price tend to co-move
one for one.

Method 2 : Manual T-test

Hypothesis
H0 : β = 1
H1 : β ≠ 1

(0.982223 – 1)
Test statistic =
0.023644

= - 0.75186

Critical value (t-distribution table - since it’s a two-tail test, 5%/2 = 2.5%)
Critical value (0.025, 64) = 2.0003

T-statistic (- 0.75186) is less than critical value (2.0003). Do not reject H0. Conclusion,
β = 1. Yes, futures price of an underlying asset and its spot price tend to co-move one for one.

(d)
DependentVariabl
e:LOGSPOT
Method:LeastSquares
Date:09/
18/20 Time:15:04
Sample:2002M022007M07
I
ncl
udedobs ervati
ons:66
Var
iabl
e Coeffi
cient St
d.Er
ror t
-St
ati
st
ic Pr
ob.
LOGFUTURES 0.
983809 0.
025376 38.76852 0.
0000
C 0.
114411 0.
178775 0.639973 0.
5245
R-squared 0.959158 Meandependentv ar 7.043569
AdjustedR- s
quared 0.958519 S.
D.dependentv ar 0.156727
S.E.ofregression 0.031920 Akaik
einfocri
t
eri
on -
4.021321
Sum s quaredresi
d 0.065210 Schwarzcri
t
erion -
3.954968
Logli
k el
ihood 134.7036 Hannan-Qui
nnc ri
ter
. -
3.995102
F-st
atist
ic 1502.998 Durbi
n-Watsonstat 2.012684
Prob(F-stat
is
ti
c) 0.000000

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Does the logarithmic transformation change your results in (b) and (c)?
Compared to (b), the coefficient seems to be slightly different.
Replicating (c)
WaldTest
:
Equat
i
on:Unt
i
tl
ed
Tes
tSt
ati
st
ic Val
ue df Pr
obabi
l
it
y
t
-st
ati
sti
c -
0.638040 64 0.
5257
F-
stat
ist
ic 0.407095 (
1,64) 0.
5257
Chi
-square 0.407095 1 0.
5234

Nul
lHy
pot
hes
is:C(
1)=1
Nul
lHy
pot
hes
isSummary:
Nor
mal
i
zedRes
tri
ct
ion(
=0) Val
ue St
d.Er
r.
-
1+C(
1) -
0.016191 0.
025376
Res
tri
ct
ionsar
eli
neari
ncoeffi
cient
s.

P-value (0.5257) is more than 0.05 (5% level of significance).

Do not reject H0
Conclusion, β = 1. Yes, futures price of an underlying asset and its spot price tend to co-move
one for one. The conclusion is same as before.

(e) 95% confidence interval for the slope coefficient of log(futures).

t SE()*t SE()
(0.983809 – T(62,0.025) x 0.25376), (0.983809 + T(62,0.025) x 0.25376)
= (0.983809 – 2.0003 x 0.25376), (0.983809 + 2.0003 x 0.25376)
= (0.47621, 1.49141)
Since 1 lies between the 95% confidence interval, do not reject H0.

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