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**INDICATORS ON STOCK PRICES USING
**

MULTIPLE REGRESSION

SYS 302

Spring 2000

Professor Tony Smith

Yale Chang

Carl Yeung

Chris Yip

TABLE OF CONTENTS

I.

INTRODUCTION

A. Chosen Economic Variables

B. Assumptions on the Regression Model

II.

ANALYSIS

A. Single Regression Models of TCB 500 Against Indicators

B. Preliminary Multiple Regression

C. Multicollinearity

D. Choosing Variables With the Stepwise Regression Model

E. Gauss-Markov Assumptions: Heteroscedasticity and Autocorrelation

F. Predictive Abilities of the Regression Models

III.

CONCLUSION

A. Single Regression Discussion

B. Multiple Regression Discussion

IV.

SUPPLEMENTS

A. Appendix A

B. Appendix B

1

I. INTRODUCTION

Every month, anxious investors eagerly await the release of key economic

indicators such as the employment report, CPI, and even housing starts. It is not

uncommon for the Dow Jones Industrial Average and NASDAQ to swing more than a

hundred points when the numbers only slightly miss consensus estimates. Every indicator

is an important measure of some facet of the domestic economy, but do these numbers

really shape the movement of stock prices in the long run? Which indicators yield the

most influence on the equity market? Can a model consisting of these indicators be

constructed to accurately forecast the stock market? And are any single indicators a good

predictor of stock prices? As curious investors ourselves, we developed a statistical

model in an attempt to detect a trend between stock prices and such variables and

evaluated the predictive abilities of the model.

Data was obtained from The Conference Board Economic Indicator Package,

provided by Wharton Research Data Services (WRDS). Monthly time series data was

obtained for stock market prices and a selection of economic indicators over a span of

twenty years, from January 1979 to January 1999. This period was chosen because of the

relative stability of the economy, the nation’s minimal exposure to severe external shock

(i.e. wars), and the comprehensiveness of the data. The stock market index provided by

the Conference Board is the TCB 500 common stock index, which is not commonly

quoted; each data point represents the index’s closing price for the given month. This

index was employed in our analysis because it represents the stock market more fully

than the Dow Jones Industrial Average, which includes only thirty stocks. Furthermore, a

2

as the single regression shows below: SPX By TCB 500 Stock 1300 1100 900 S 800 P X 600 500 300 100 0 0 100 300 500 700 500 Stock 900 1100 1300 Linear Fit Linear Fit SPX = 0.997678 Root Mean Square Error 12.3486 Observations (or Sum Wgts) 241 A time series graph comparing the two indices is also shown below: SP 500 vs TCB 500 1400 1200 1000 TCB 500 SP 500 800 600 400 200 0 time (1979-1999) 3 .05124 + 1.80636 Mean of Response 370.comparison of the TCB 500 and the SP500 revealed that the two indices are almost identical.00486 500 Stock Summary of Fit Rsquare 0.997687 RSquare Adj 0.

Building permits for new private housing units (thousands) Producer and Consumer Prices: 11.A. NSA (1982=100) Raw cotton (1982=100) Domestic apparel wool (1982=100) Personal Income: 14. consumer goods and materials (mil. Producer Price Index.) 7. unemployment insurance (thousands) 4. Capacity utilization rate. chain 1992 $) 6. Civilian unemployment rate (pct. Index of consumer confidence (1985=100) COPYRIGHTED (The Conf Bd) 4 . and each indicator was chosen to measure a distinct component of the economy. Vendor performance. and Capacity Utilization: 8. manufacturing. Average weekly hours. all items (1982-84=100) Commodity Prices: 13. chain 1992 $) 10.) Sales. Contracts and orders for plant and equipment (bil. Composite index of 10 leading indicators (1992 = 100) Labor force. total industry (pct. and Deliveries: 5. Chosen Economic Indicators The variables included in our initial analysis compose only a portion of the complete set of economic indicators released monthly. Average weekly initial claims. chain 1992 $) 15. Orders. 1. Chain 1992 $) Output. CPI for all urban consumers.) Fixed Capital Investment: 9. slower deliveries diffusion index (pct. Production. finished goods (1982=100) 12. Index of sensitive materials prices (level. employment. Manufacturing and trade sales (mil. bil. The list below is by no means exhaustive. Personal income less transfer payments (AR. (hours) 3. and unemployment: 2. Manufacturers' new orders. 1992=100) Incln: Cattle hides (1982=100) Lumber and wood products (1982=100) Iron and steel scrap (1982=100) Copper base scrap (1982=100) Aluminum base scrap (1982=100) Nonferrous scrap.

10-year Treasury bonds less federal funds 19. Index of consumer expectations (1985=100) COPYRIGHTED (The Conf Bd) Money. chain 1992 $) 18. $) = Trade Balance International Comparisions: 21. dollar. $) .S.General imports (mil. NSA (Mar. excluding military aid shipments (mil. Interest rate spread. NSA (pct. 1973=100) 5 . Exports. Credit. Exchange value of U. Federal funds rate. and Stock Prices: 17.) Exports and Imports: 20.16. Interest Rates. M2 (bil. Money supply.

The different economic variables chosen are not released on the same day within a given month. From the earlier discussion. observable influence on the price changes in the stock market. The quarterly released indicator such as GDP and productivity were not included in our model since the time series data is on a monthly scale. However. 4. While figures such as GDP undoubtedly play an important role in affecting stock prices. 2. 3. the employment survey is released the first Friday of every month. 5. We have assumed that the TCB 500 index is a good proxy for the equity market. For example. we found that it does represent the S&P 500 index well. 6 . while the CPI is released the Tuesday of the third week. The relationship between the TCB 500 stock index level and the chosen indicators was assumed to be linear and subject to random error. The basic assumption made on the data set was that the chosen economic indicators exert significant. Assumptions on the Regression Model 1. We have assumed that this difference in timing does not affect our correlation model. The Gauss-Markov model was not automatically assumed. it is often argued that the S&P 500 is not the best measure of equity market movements since it is not mean and variance sufficient. their inclusion in the model would most likely produce inconsistencies. Unique tests were conducted to examine the Gauss-Markov assumptions as well as heteroscedasticity and autocorrelation in order to derive an acceptable model.B.

985999 31.42545 t Ratio -3. with R2 values of at least 0.65247 11. These plots show that the only indicators which seem to display a smooth. The polynomial fits of these four variables correlate surprisingly well with the stock index. and personal income. plotting the TCB 500 common stock index against all economic indicators.25715 368.II.81 -1. ANALYSIS A.1908 13. Single Regression Models of TCB 500 Against Indicators To begin our study.24 3. Preliminary Multiple Regression While single regressions can be limited in their analysis.89806 7 0. manufacturing and trade sales.0002 0. CPI. single regression models of the TCB 500 index were run against each economic indicator to obtain a graphical interpretation of how well each variable correlates with the stock market. The results of the multiple regression are shown below: Response: 500 Stock Summary of Fit RSquare RSquare Adj Root Mean Square Error Mean of Response Observations (or Sum Wgts) Term Intercept 10 Leading Ind Avg Wkly Hr Parameter Estimates Estimate -2845.95 (see Appdendix B). B.987224 0. multiple regression models simultaneously take into account the effects of each variable. The regression plots for each indicator are attached at the end of the report as Appendix A.1406 .0014 0.48 Prob>|t| 0.003024 -16. consistent relationship with the TCB 500 index are the following: index of ten leading indicators.606 52.508 241 Std Error 879. we proceeded to perform a preliminary multiple regression. A standard least squares multiple regression was conducted. With this information in mind.

1874 2.001011 3.3041 <.106 1 2490.342 1 2137.39 0.0001 0.0001 <.0000 27. it appears that the available data is sufficient to describe the movement in stock prices.540 1 42538.0045 0.88931 3.1739166 -9.3041 <.5089 2.8768 0.0041 17.001289 0.003696 -0.0170 0.0001 Prob>F 0.9981 <.0001 <.565865 0. 8 .11 3.771536 0.9287 61.134 1 21787.05578 0.001 1 1036.87 -1.0148 0.970 1 4.772 1 5649.283 1 14812.52264 -0.28 -4.28 7.0001 <.9145 0.84474 0.2128 <.0344 1.1406 0.106776 3.731443 0.72 -0.0170 0.00142 0.1186 3.0001 0.4029118 -3.60 -5.2128 <.0609 43.097376 0.0115 15.87 2.1615 0.0148 0.659718 3. Not surprisingly.0001 This model shows an excellent fit.634698 0.00 -5.006 1 16726.0001 0.005 1 27286.0001 <.9490 <.14 -5.921 1 27623.46 1.891 1.068953 0.000586 0.340 1 39936.0046085 0.0001526 1.5391 27.81 -2.0002 0.128894 0.0001 <.9221 22.1118 0.9181248 -17.0001 0.0001 <.0001 <.0001 <.024568 0.564221 -18.162113 -0.1205 28.0045 0.850 1 5895.1118 0.2738 23.0024846 3.40 0.60 -2.660 1 1525.388 1 0.667677 0.2231 1.108 1 27280.0001 0.5612 40.491674 Effect Test DF Sum of Squares 1 14175.UE Claims Mfrs New Orders Vendor Prfm Bldg Permit M2 Intrt Rate Spre UE Rate Capacity Util R Mnfr & Trade Sa Cntrct & Orders PPI CPI Comd Prices Pers Inc Cnsmr Conf Cnsmr Expt FF Rate Trade Balance Ex Value USD Source 10 Leading Ind Avg Wkly Hr UE Claims Mfrs New Orders Vendor Prfm Bldg Permit M2 Intrt Rate Spre UE Rate Capacity Util R Mnfr & Trade Sa Cntrct & Orders PPI CPI Comd Prices Pers Inc Cnsmr Conf Cnsmr Expt FF Rate Trade Balance Ex Value USD 0.563 1 60460.0001 0.9145 0.062 1 11.023767 -18.9981 <.2057853 -0.0001 <.89 F Ratio 14.32 4.25 -6.9144678 Nparm 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0.0001 0.8836 6.92238 10.987).0001 <.0001 0.03 -6.716969 0.7820 0.796 1 22613.06 4.5490 8.9490 <.361 1 8034.13577 2.3001 0.738489 -0.0406398 0. the four variables that demonstrated high correlation with the TCB 500 from the earlier single regressions have also produced highly significant pvalues here.1459 5. with almost 99% of the variance accounted for (R2 = 0.

5383 0.5548 0. which has a p-value of almost 1! It seems illogical to claim that what is probably the most closely watched measure of economic performance by Wall Street and the Fed has practically no effect on stock prices.6625 1 0.8574 0.1647 0.1002 -0.0114 0.2774 0.0488 0.6852 0.9746 0.812 0.3827 0. as well as consumer confidence and consumer expectations.5157 0.5351 0.6018 0.8576 0.857 -0.5588 0.2309 0.1685 0. a correlation plot between the stock index and the economic indicators was drawn to determine which variables are highly dependent: Variable 10 Mfrs Avg UE Bldg Leading New Wkly Hr Claims Permit Indicies Orders 10 Leading Ind 1 Avg Wkly Hr 0.1745 -0.6369 0.4303 0.9707 0.339 0.3413 Capacity Util Rate Mnfr & Trade Sales Cntrct & Orders 0.9428 0.249 -0. It is also strange that the coefficients for CPI and PPI have opposite signs even though they both measure inflation.7539 -0.1141 0.4541 -0.2604 0.6095 -0.711 CPI 0.7652 0.1331 -0.5108 0.4352 0.3864 0.8053 -0.8062 0.5514 -0.2056 -0.9393 0.6095 0. such as the trade balance.5006 -0.8574 0.5284 0.2914 -0.8275 0.1755 0.4352 0.6052 0.2785 -0.2052 0.6826 -0.1944 -0.6707 0.8006 -0.857 0.7214 -0.9872 0.0825 -0.8492 0.3059 -0.0688 0.4541 0.7468 0.8176 -0.7067 0.7662 1 0.1647 M2 0.2276 .8954 0.7062 0.812 Mfrs New Orders 0.2052 0.7084 1 0.9862 0.7062 -0.6018 -0.9393 -0.7427 -0.6249 0.3774 -0.268 0.4037 -0.326 0.114 0.5033 -0.3774 0.6496 -0.1755 -0.8606 PPI 0.8006 0.8241 -0.3864 -0.877 0.7075 0.1002 0.7214 9 1 0.8769 0.0743 -0.1047 -0.8315 1 0.6957 -0.1116 0.0964 0.9078 -0.8185 -0.4463 0.6369 -0.8968 M2 Intrt Rate Spread UE Rate Capacit Mnfr & Cntrct y Util Trade & Rate Sales Orders PPI CPI Pers Inc Cnsmr Cnsmr Conf Expt FF Rate Trade Ex Value Balance USD 0.5588 0.809 0.9746 0.3137 0.0466 0.1331 0.5733 -0.7539 -0.4933 0.7396 -0.4231 -0.6887 -0.1047 0.7474 -0.2123 0.8492 0.9299 0.5383 0.2774 -0.7707 -0.9349 0.8156 -0.13 500 Stock -0.3242 -0.272 0.8241 0.1916 1 0.4653 -0.2577 -0.7254 0.1604 -0.877 1 1 -0.8769 0.2104 0. commodity prices.1141 -0.84 -0.7392 1 -0.3832 -0.1259 0.878 0.4463 0.2123 -0.9872 Pers Inc 0.4955 0.0489 0.6963 -0.8576 0.7119 -0.9707 Cnsmr Conf 0.2923 0.1745 -0.9075 0.0072 0. the unemployment rate and unemployment claims also have a negative correlation. C. To refine the model.1944 -0.1916 -0.7254 -0.5157 0.3325 0.8714 1 -0.6413 0.8261 -0.9282 -0.1954 0.1954 -0.6963 0.4777 0.8699 0.4702 0.1604 0.797 UE Claims -0.5724 0.4607 0.8853 0.4702 -0.8025 -0. and the unemployment rate.9075 0.9541 0.2914 -0.8765 -0.On the other hand.7549 0.5033 0.9862 0.3325 0.8261 0.5441 0.8699 -0.6909 0.5578 0.2577 0.6671 1 -0.1141 0.6496 0.9665 0.878 -0.5041 0.6457 0.8368 1 0. Multicollinearity A possible explanation of these discrepancies might be multicollinearity.4328 -0.7852 -0.9078 0.5596 0.268 -0.4645 Bldg Permit 0.4231 0.6826 0.5724 0.9115 -0.4912 Cnsmr Expt 0.6713 0.1259 -0.5578 0.7075 0.897 0.6052 1 1 0.7067 0.1118 0.339 0.9428 0.6436 0.6457 0.0466 0.8606 0. not all of the variables are significant.1679 0.4068 UE Rate -0.5383 -0.1116 0.897 0.2923 -0.0072 0.0033 0.8954 0.4024 0.6249 0.5284 -0.9299 0.1679 -0.326 0.0688 0.1329 -0.5514 0. Similarly.915 0.4912 0.8275 -0.6713 -0.6887 0.915 0.4653 0.1685 -0.9665 0.4024 0. which undermines the significance of the individual coefficients.6909 0.8062 0.2056 0.9349 0.7852 0.6707 0.809 0.8064 -0.5041 -0.2715 -0.1118 0.5305 0.5351 1 -0.7392 -0.4303 -0.2604 0.7755 -0.0114 -0.1388 -0.2104 -0.7336 -0.3059 -0.8853 0.6436 -0.5157 0.8572 -0.8053 0.8968 -0.1141 -0.7549 -0.2715 -0.0964 Intrt Rate Spread 0.6377 0.4328 0.5383 0.1329 0.7707 0.2309 0.7427 0.4068 -0.

0922 0.8006 0.7254 -0.2276 -0.13 -0.0033 0.9078 0.1259 0.575 -0.6496 -0.1118 0.6852 1 0.7889 0.7889 From this correlation plot.7852 0.1002 0.2154 -0.0688 0.3413 -0.8368 -0.6625 -0.6009 1 0.7539 -0.0489 0.5305 0.7474 -0.877 1 UE Rate -0.4955 0.7652 0.0964 0. Most importantly.6249 0.2577 0.8261 0.8699 0.7119 1 -0.1127 0.5157 0.208 Permit M2 Intrt Rate Spread 0.3827 -0.4645 -0.5006 -0.9282 0.1604 -0.7662 -0.5006 0.1047 -0.1141 0.5157 0.6009 -0.7427 -0.7119 0.6377 0.7062 -0.2914 -0.8241 -0.2276 -0.2084 -0.2577 -0.6413 -0.812 -0.6462 10 .3059 -0.13 -0. M2 (bil.3413 1 -0.4328 -0.3832 0.7755 -0.4653 -0.4503 0.4702 0.3059 -0.812 0.114 -0.6887 0.7191 0.5588 0.114 -0.6374 0.4068 0.7468 -0.7067 0. the index of leading indicators includes the TCB 500 common stock index.1944 -0.8176 0.1647 1 0.2154 1 -0.6095 -0.2923 -0.4607 -0.5596 -0.9282 0.8156 0.8006 -0.6457 0.1141 0.5033 -0.1116 0.0489 0.0688 0.5441 -0.8185 -0.6671 -0.0114 -0.8315 -0.8275 -0.1685 -0.5041 -0.9115 0.2923 0.1745 -0.5578 0.84 -0.6338 Ex Value USD -0.2906 -0.797 -0.8025 -0.9746 0.) Index of stock prices. As a result.9541 0. further economic research was conducted on these indicators.7852 -0.0488 0.8176 0.2785 -0. mfg.3242 -0.249 0.8062 0.4352 -0.4911 0.4653 0.7227 Orders Bldg 0. we later discovered that the index of ten leading indicators actually includes many of the above variables.5284 -0.0488 0.9541 0.FF Rate -0.8025 -0.6413 0.6018 -0. the composite index of 10 leading indicators shows much higher correlation with the following individual variables than with the stock index: Average weekly hours.5108 0.272 0.3827 0.0072 0.7539 -0.6957 -0.9115 0.8765 0.2785 -0.6369 -0.7468 Hr Mfrs Bldg New Permit Orders M2 Intrt Rate Spread UE Rate Capacit Mnfr & Cntrct y Util Trade & Rate Sales Orders PPI CPI Pers Inc Cnsmr Cnsmr Conf Expt FF Rate Trade Balance Ex Vendor Comd Value Prfm Prices USD 0.8275 -0.6457 0.2774 -0.8062 0.7336 1 0.7392 1 0.3242 -0.5383 0.249 0.3459 0.5003 Mfrs New 0.3864 0.4427 1 -0.1329 -0.6963 -0.0489 0.3409 0.4303 0.4933 -0.1685 0.8572 0.1647 0.6009 -0.5157 0.249 0.272 0.878 0.4777 0.7652 0.1916 -0.8574 0.8765 0.1916 Capacity Util Rate 0.5733 -0.4352 -0.7084 -0.3137 0.797 0.8572 0.5733 -0.0743 -0.5284 0.4037 -0.84 -0.268 -0.4024 0.5006 0.8492 0. a second correlation plot was performed without the index of leading indicators: Variable 500 Stock 500 Avg UE Stocks Wkly Hr Claims 1 Avg Wkly 0.4352 0.7707 0.8064 -0.4427 -0.6852 0.6338 0.5351 -0.6625 -0.1002 -0.8064 -0.0466 0.114 0.7336 0.8053 0.9115 0.1116 0.9393 0.4777 0.5108 -0.1857 0.4645 -0.1331 0.7468 -0.6377 0.4549 -0.4427 0.4463 0.4068 -0.6496 0.1388 -0.2123 -0.7652 0.2715 -0.0743 -0.711 -0.1259 -0.4955 0. (hours) Manufacturers' new orders Manufacturing and trade sales Vendor performance Building permits for new private housing units (thous. chain 1992 $) Interest rate spread.5548 -0. 10-year Treasury bonds less federal funds Trade balance Personal savings PPI CPI Given the large number of dependent variables with such high correlations.857 0.6377 -0.5514 -0.7067 0.2052 0.5992 1 UE Claims -0.8714 -0.0825 Trade Balance -0.339 0.915 0.0964 1 0.4345 500 Stock 0.2123 0. NSA (1941-43=10) Money supply.7889 -0.7392 -0.4345 -0.6826 -0.5305 0.7396 -0.6436 0.8769 0. 500 common stocks.6826 0.5157 0.4541 -0.9078 -0.

1372 11 1 0.3059 -0.5588 0.3864 -0.6624 1 0. and PPI.6009 -0.4503 -0.5514 Cnsmr Conf 0.9393 -0.7062 0.6413 -0.4724 0.4352 -0.6457 0.13 0.1745 -0.8769 0.1127 0.0591 -0.575 0.1159 0.2785 -0.5548 0.1453 0.4777 0.0922 0.9299 0.4527 -0.8606 0.6529 0.6052 CPI 0.9872 Pers Inc 1 0.3137 0.3413 -0.6231 1 -0.0488 0.8315 -0.7084 -0.5003 0.3864 -0.8241 0.3137 0.0743 -0.7336 0.6909 0.3325 0.4549 0.6963 -0.5383 -0.3242 -0.6374 UE Claims -0.3459 0.5305 0.2104 0.3242 0.7214 -0.9299 0.13 -0.2906 -0.7119 0.4503 -0.8275 1 0.6496 -0.1141 -0.4777 0.1388 -0.4607 0.8275 -0.2604 0.5441 -0.3991 -0.1857 0.5441 0.3013 -0.1916 UE Rate Capacity Util 0.4911 -0.5108 -0.2797 -0.4463 0.2052 0.4463 0.5284 0.4463 0.1118 0. personal income. As a result.5157 0.5383 0.4933 0.2276 0.2123 0.3325 Cnsmr Expt 0.1874 0.2056 -0.6949 PPI 0.1916 -0.9862 0.1604 0.1388 -0.7067 0.3137 0.7112 0.2154 -0.5514 -0.2604 0.3991 0.2906 -0.1388 -0.208 0.1857 0.1944 -0.4724 0.5588 0.4911 0.2685 -0.1954 -0.7468 -0.3059 -0.9428 0.5733 -0.2052 0.6707 0.339 0.6374 -0.3991 -0.1679 0.5041 0.6462 0.2923 -0.1679 -0.3827 -0.812 0.4527 0.1755 0.711 -0.4345 -0.0688 0.1116 0.5284 -0.3325 0.1331 0.6707 0.1388 -0.7396 -0.8572 Orders -0.7755 -0.4955 0.4933 -0.5578 0.6949 0.1141 0.4645 -0.1002 -0.5733 -0.2018 0.6671 -0.0825 0.0964 0.4328 0.8241 0.6963 0.1954 0.5006 -0.7214 -0.8606 1 0.0825 -0.4541 0.0591 Comd Prices 0.6813 0.4653 -0.7468 1 -0.2154 FF Rate Trade Balance -0.3013 -0.9282 0.7336 -0.8765 0.7474 -0.0671 0.0488 0.1372 1 0.7652 0.7755 -0.2154 -0.1384 -0.1453 0.9428 0.1331 -0.8176 0.6625 -0.5578 0.9707 0.8765 0.8053 -0.2797 -0.5351 0.797 0.3991 0.7662 -0.5351 0.2685 -0.0743 -0.6949 0.0466 0.3686 0.272 0.3686 0.0114 0.5596 -0.6369 0.5003 -0.8765 0.6338 -0.3864 -0.0922 0.7755 -0.7889 -0.2084 0.2774 0.2123 -0.4702 -0.2154 1 0.0825 -0.187 0.0033 0.1384 FF Rate -0.249 Rate Cntrct & 0.1159 0.4352 0.4702 0. the following indicators were also removed: manufacturing new orders.3832 0.3459 0.249 0.5992 0.2084 0.5041 -0.5041 -0.1116 -0.4527 -0. manufacturing and trade sales.575 0.5157 0.1047 0.797 0.4068 1 0.1141 -0.2577 0.711 -0.7474 1 0.Mnfr & Trade Sales Cntrct & Orders 0.3686 0.2914 -0.4645 0.7084 -0.3325 0.6887 -0.4037 -0.4777 0.6374 -0.5108 0.6624 0.0489 0.1384 -0.4427 -0.6887 -0.5033 0.8853 0.7254 0.6529 0.7662 1 0.877 0.6009 -0.1259 0.7254 0.7889 -0.6462 0.268 0.4645 -0.878 -0.6624 0.6957 -0.6413 -0.8025 -0.4037 -0.915 0.2685 -.6462 0.2104 -0.2276 -0.7427 0.1127 -0.5514 0.7067 0.3242 -0.7119 0.5003 0.1384 -0.1329 0.1755 -0.7191 0.9746 0.7119 -0.7191 0.809 0.7707 -0.0114 -0.4702 -0.1874 0.3013 -0.5383 0.7539 -0.0072 0.6457 0.6957 -0.8572 0.6624 1 0.4352 -0.1159 0.6671 -0.1127 -0.4068 -0.1372 1 .6338 0.6413 -0.5351 -0.1954 0.8241 -0.1259 -0.857 -0.2785 -0.1745 -0.1047 0. as shown by the highlighted values above.2084 -0.2923 -0.8572 0.7755 -0.6338 1 0.5992 0.3413 0.4037 -0.6231 0.0114 0.1141 -0.8025 -0.1159 0.4024 1 0.6436 0.3413 -0.4549 0.9872 0.9707 Cnsmr Conf Cnsmr Expt 1 0.0591 -0.7214 1 -0.7214 -0.8853 0.877 0.5578 0.6671 1 -0.1002 0.6909 0.5733 -0.0.8006 0.6496 Intrt Rate Spread 0.9862 0.4912 0.3827 -0.2056 0.6052 0.0671 0.3827 0.4549 -0.4653 1 M2 0.7254 -0.3459 0.0688 0.2052 0.6852 -0.5383 -0.6826 -0.1679 0.1857 0.6018 -0.5108 -0.6377 0.7112 0.8574 0.0033 0.7889 -0.877 0.5033 -0.13 1 0.5588 1 0.6826 0.2577 -0.0743 -0.114 -0.7662 -0.6338 0.7336 0.6095 0.4527 0.272 0.7084 -0.4607 0.1372 Based on the above grid.268 0.6671 -0.6813 0.208 0.812 1 Bldg Permit 0.5441 -0.4303 -0.8368 -0.4503 0.0489 0.4345 0.0033 0.8261 -0.1874 0.809 0.1954 -0.0964 1 0.3137 0.4037 -0.4607 -0.5006 0.8699 -0. The final correlation plot is shown below: Variable 500 Avg Wkly UE Hr Claims Stock Bldg Permit M2 Intrt Rate Capacity Cntrct & UE Rate Spread Util Rate Orders CPI Cnsmr Cnsmr Conf Expt FF Rate Trade Ex Value Vendor Comd Balance USD Prfm Prices 500 Stock 1 0.0591 -0.3832 1 -0.4427 0.4427 -0.6707 0.0922 0.1874 0.4345 Vendor Prfm 0.1141 -0.4912 1 0.4724 0.4345 -0.6436 -0.7539 -0.8064 -0. multicollinearity was still found among other variables.0488 1 -0.5548 -0.575 -0.2914 -0.268 -0.4955 0.7191 -0.6963 0.8064 -0.2906 -0.6707 0.8492 0.1329 -0.1745 -0.3686 0.9541 0.5596 0.6009 -0.5992 Avg Wkly Hr 0.5157 0.6249 0.8368 -0.8064 -0.2785 -0.3409 0.5033 0.4607 -0.6529 -0.187 0.2914 -0.8261 0.1329 0.6018 0.0825 Trade Balance Ex Value USD Vendor Prfm Comd Prices -0.2715 -0.6852 Ex Value USD -0.6529 0.6909 0.5441 0.3832 0.2276 0.6909 CPI 0.8315 -0.6377 -0.114 0.4911 -0.6949 0.8025 0.84 -0.6018 0.6436 -0.797 -0.5383 0.8261 -0.7227 -0.1141 0.4724 0.0033 0.3832 0.8006 -0.7396 -0.7652 0.7662 -0.6887 0.6852 0.1047 0.2797 -0.2685 1 0.7084 -0.272 0.3013 -0.1679 -0.4955 -0.2797 -0.1331 -0.

250 SSE 884727.1100 0. and hence the predictability of the model.250 Prob to Leave 0.642 39. indicating highest predictability.185 "F Ratio" 0.7 147559. further removal of variables would prevent a thorough analysis of the influence of these indicators on the stock market.9472 Parameter Intercept Avg Wkly Hr UE Claims Bldg Permit M2 Intrt Rate Spread UE Rate Capacity Util Rate Estimate 2030.9444 nDF 1 1 1 1 1 1 1 1 Cp 9.964848 -29. personal income.4736768 ? -0. a stepwise regression was conducted to further narrow down the most significant indicators and to yield the highest adjusted R2 value. our objective is to find the best combination of the most significant and influential independent indicators in the regression model. manufacturing new orders.0009 0.25 209604.3213083 -32.0078 0.184 "Prob>F" 1. Although considerable correlation still exists among certain variables. The results of the first stepwise regression (Step model 1) are shown below: Response: 500 Stock Stepwise Regression Control Prob to Enter 0.0000 0.04761 -58. D.083008 -0. Although the removal of variables will slightly diminish R2.66465 28.13 121007.81886 27995.0000 0.016 38. However.The table shows that much of the multicollinearity problem has been eliminated through the removal of five indicators: index of leading indicators. manufacturing and trade sales. Choosing Variables With the Stepwise Regression Model After the filtering of certain variables.000 2. it is important to realize the impossibility of completely removing multicollinearity since all of the indicators are related in some way through macroeconomic principles. and PPI.0000 0.386 0.304 31.256008 SS 0 9987.0000 .704393 12 RSquare Adj 0.027 11.010 7.574 0.9196 0.4 43864.9 AIC 2004.215 54.99 Lock X _ _ _ _ _ _ _ Entered X X _ X X X X X DFE 228 Direction Current Estimates MSE RSquare 3880.

9171 0.166 26. However.653 7634.9455 0.72975 SS AIC 2006.37104117 1.803 0.549 9.250 SSE 914213.21451 124197.6 308604.256 p 2 3 4 5 6 7 8 9 10 11 10 11 12 13 The above stepwise regression shows that much of the multicollinearity problem has been eliminated.35 88482.006 0.250 Prob to Leave 0.0892 0.8035508 1 1 1 1 1 1 1 1 1 388882.838 36.728 73.0000 0.073 0.3 48692.218 79.0018 0.109 11304. After testing with various combinations of the variables.137 0.0001 0.699 12548.41 9302.0000 0.53 118.62 234.5487 0. and consumer confidence and expectation are no longer negatively correlated.01546194 7.827616 ? ? ? -4.0010 0.51430471 -19.9462 0.9 7634.0882 26.55712093 1.005 57.9433 nDF Cp 10.7117 0.1911 9.0749 0. for example.0000 Step History Step 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Parameter CPI Cntrct & Orders Capacity Util Rate Intrt Rate Spread Avg Wkly Hr Comd Prices M2 UE Rate Cnsmr Expt FF Rate Avg Wkly Hr Bldg Permit Avg Wkly Hr Cnsmr Conf Action Entered Entered Entered Entered Entered Entered Entered Entered Entered Entered Removed Entered Entered Entered "Sig Prob" 0.7 91356._ _ _ _ _ _ _ _ _ X X X X X _ _ _ X Cntrct & Orders CPI Cnsmr Conf Cnsmr Expt FF Rate Trade Balance Ex Value USD Vendor Prfm Comd Prices 0.9467 0.16 93389.8894 0. A possible explanation is that their inclusion in the model contributes to a higher adjusted R2 value.1621 0.9472 Cp 746. and consumer expectations are still included in the model even though they exhibit high p-values.1621 Seq SS 12866812 2028176 464129.0000 0. consumer confidence.0000 0.367 10.0000 0. the unemployment rate now has a significant p-value.1237 0.529 1.913 22.88 97. the final stepwise regression model (step model 2) is shown below: Response: 500 Stock Stepwise Regression Control Prob to Enter 0.44 1431.9454 0.79 533.7683 0.9454 Parameter Estimate 13 RSquare Adj 0.0000 0.0159 0.9334 0.086 "F Ratio" "Prob>F" .16 Lock Entered DFE 231 Direction Current Estimates MSE RSquare 3957.109 RSquare 0.7870 0.9226 0.197 12.8 28276.967 2.9317 0.3 100.007 32. average weekly hours.9418 0.348 63.9288 0.0000 0.8 104074.0000 0.9389 0.73 9.0001 0.68 47220.86 62452.1804 285.633 0.9347 0.

0000 0.3 167767 482884.285 27.015183 8.51 11. The regression is shown below: Response: 500 Stock Summary of Fit RSquare RSquare Adj Root Mean Square Error Mean of Response Observations (or Sum Wgts) Term Intercept M2 Intrt Rate Spre UE Rate Capacity Util R Cntrct & Orders CPI Cnsmr Expt FF Rate Comd Prices Source M2 Intrt Rate Spre Parameter Estimates Estimate 2744.0001 <.42 -4.X _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ X _ _ _ X X X X X X _ X X _ _ _ X Intercept Avg Wkly Hr UE Claims Bldg Permit M2 Intrt Rate Spread UE Rate Capacity Util Rate Cntrct & Orders CPI Cnsmr Conf Cnsmr Expt FF Rate Trade Balance Ex Value USD Vendor Prfm Comd Prices 2744.042687 5.426 -0.3164773 -30.0000 0.0000 0.85324 -26.8281 0.965 35.000 0.608083 Nparm 1 1 0.0000 0.0001 1.480 3.699 1904.0001 <.188 19.0001 <.215112 1169.7 109618.114 0.0749 0.316477 -30.0001 <.9651 35.0001 <.0001.32891 0.94 -5.0001 <.337484 3.9444).201 54. the “entered” indicators all show highly significant pvalues of p < 0.788 0.26 -6.92614 139365.853244 -26.62389599 ? 2.95 0.16589636 -15.8 139643. the standard least squares multiple regression was performed again to create a final linear model (Model A).391 122.072942 -68.0000 .328913 0.69 14 t Ratio 5.508 241 Std Error 483.943285 62.6080835 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 1431.67 -7.0001 Prob>F <. Using the set of indicators obtained from the results of the stepwise regression.5878 0.337 163006.016 35.0000 0.0001 <.0000 0.0000 0.361 0.214 Although the above model has a slightly lower adjusted R2 value than the previous stepwise model (0.5487 0.054 41.013 211.9433 < 0.4891 0.707916 ? ? ? -4.043872 0.295 0.90972 368.76 1 139643.062709 13.0001 <.9941 0.1658964 -15.8984 0.568 12548.58 64.0828 4.698 42.5 0.37 -5.000 0.6 838177.623896 2.41 -5.70792 -4.8157 0.93 F Ratio 54.01518301 8.42601 ? ? ? -0.592589 0.3 216.07294 -68.2847 Prob>|t| <.41 217531.0000 0.001375 0.0000 0.05 14.945412 0.55 6.776534 Effect Test DF Sum of Squares 1 217531.5 75646.592863 0.0001 <.0001 <.

7875 41.3908 122. i = 1. Gauss-Markov Assumptions: Heteroscedasticity and Autocorrelation The Gauss-Markov Assumptions can be stated as follows: (i) εi ∼N(0.0001 <.0001 <.30 163006.6979 42.987 obtained in our preliminary multiple regression.51 75646. the residuals of the model must be normally distributed. . n (ii) Var (εi) = σ2. . Although the R2 value of our refined model is slightly less than the R2 value of 0. σ2). n (iii) (εi. and the most influence on the TCB 500. three of the four “good” variables identified from the single regressions have been removed in the refinement process.1142 35.62 838177. E.2144 <. we can be confident that the final combination of indicators exhibits high significance.0001 <.02 482884. ….0001 <. .0135 211.95 139365.9454.UE Rate Capacity Util R Cntrct & Orders CPI Cnsmr Expt FF Rate Comd Prices 1 1 1 1 1 1 1 1 1 1 1 1 1 1 109618.0001 <.0001 In this final revised model.1879 19. Interestingly.53 27.27 167767. the R2 value is 0.0001 <. …. εn) mutually independent If the final least squares model fits the first Gauss-Markov assumption. A normal quantile plot of the residuals is shown below: 15 . independence. i = 1. .

01 .200 .0001 .05 . possible violations of the constantvariance assumption must be tested for. the first Gauss-Markov assumption is valid for this regression model. for the new model to be accepted.75 .25 . therefore.5179 Prob>F <.99 150 100 50 0 -50 -100 -150 -3 -2 -1 0 1 2 3 Normal Quantile The above plot shows that the residuals are extremely close to being normally distributed. Next.90 . The whole model test and the residual plot of the multiple regression are shown below: Whole-Model Test 1300 1100 900 800 600 500 300 100 0 -100 Source Model Error C Total 100 300 500 500 Stock 700 900 Predicted 1100 1300 Analysis of Variance DF Sum of Squares Mean Square 9 15833148 1759239 231 914213 3958 240 16747362 16 F Ratio 444.50 .10 .95 .

meaning that the increase in values of the economic indicators does not produce overall increasing variance in the TCB 500. Econometric Analysis). but the variances are not significantly increasing.H. Thus. 241 AutoCorrelation 0. Although the residual plot shows no significantly discrepant values.89 (W.65 and dU = 1.5751493 Durbin-Watson Number of Obs. Green. the residual plot does not show any significant trend of increasing variance. So to test for autocorrelation in our model. although the residuals appear more scattered at higher values of x. This is not surprising because the data consists 17 . there are no predicted y values that terribly miss the mark. the Durbin-Watson test was conducted. This shows that our data contains serious autocorrelation problems. the residuals seem to display a slightly cyclical pattern.05.R 150 e s 100 i d 50 u a 0 l -50 -100 -150 -100 100 300 500 500 Stock 700 900 Predicted 1100 1300 The whole model test plot shows that the data points are more scattered at higher values of the x-axis. Similarly. the model can be accepted as fitting the constant variance assumption.7038 For a one-sided test at α = 0. the Durbin-Watson values for k = 11 and n = 200 are dL = 1. The results are as follows: Durbin-Watson 0.

6921693 Nparm 1 ? ? 44. After transforming the variables. There are two alternatives to solving the autocorrelation problem: 1) perform a two-stage estimation procedure to modify the data by weighted differencing or 2) add additional variables which can account for the apparent autocorrelation effect.08 t Ratio ? 14. the two-stage estimation procedure was performed.0001 Prob>F <. we would end up with our preliminary model and still not be able to correct autocorrelation.79234 117.of time series statistics that include business cycles and economic fluctuations.692.0001 The estimate for p-hat is 0.855281 32. the new data set was used to run the multiple regression again (Model Atransformed).27803 0.55 F Ratio 211.860731 0.136608 240 Std Error 0 0. and the no-intercept regression of the residuals are shown below: Response: Residual 500 Stock Summary of Fit RSquare RSquare Adj Root Mean Square Error Mean of Response Observations (or Sum Wgts) Term Intercept Lag Residuals Source Lag Residuals Parameter Estimates Estimate Zeroed 0 0. The final result is shown below: Response: T.0965 . 500 Stock Summary of Fit RSquare RSquare Adj Root Mean Square Error Mean of Response 18 0. Therefore. all of the x-variables used in our regressions are economic indicators and therefore unavoidably reflect business fluctuations. as shown in bold.7183 Prob>|t| ? <.04757 Effect Test DF Sum of Squares 1 415083. Although the second alternative is generally a superior approach. if we add any more of the variables that we eliminated.

75 0 100 300 500 500 Stock 700 900 Predicted 1100 1300 0 19 100 200 300 T.98903 0.0040738 10.29684 -21.47 -4.81 13.000847 0.0002 Effect Test DF Sum of Squares 1 32127.317441 4.Observations (or Sum Wgts) Term Intercept T.0001 <.20 5.9146 70.0001 <.84 1 24857. FF Rate T.0002 Model Atransformed Model A o 600 c 500 k 300 200 150 100 50 100 0 -100 t Ratio 6. Cons.0001 <.057743 0.7511 5.27 -2.8725 0. UE Rate T.034767 Prob>|t| <.M2 T.16051 -23.0001 0.77922 -93.81747 -3.97 1 187351.0001 <. Cont & Ords T. Comd Prices 240 Parameter Estimates Estimate 870. Comd Prices Source T. FF Rate T.9507 23. Cont & Ords T. CPI T.0258 Durbin-Watson Number of Obs.2567 34.99 1 19264. Expect T.40 -3.6722569 -10.8771 17.0001 <.046571 1.0001 <.0001 <.761136 0.91 4. 240 AutoCorrelation 0.0001 <.M2 T.38 -5.50438 1.50 -5.93 1 15082.0001 <. Expect T. UE Rate T.85 1 6201.48 F Ratio 29.0171 0.0001 <.58837 -0.054307 5.2255 27. Int Rate Spr T. CPI T.23 1 29841.9526597 T .145625 11.0001 0. Int Rate Spr T. 1300 5 1100 800 450 0 400 0 350 S 300 t 250 900 Prob>F <.0001 <.7674 14.69 1 37583.1164 174.23 -8. 500 Stock Predicted 400 . Cap Util Rat T.875311 Nparm 1 1 1 1 1 1 1 1 1 Std Error 133.11445 4. Cap Util Rat T.0171 0. Cons.29 1 75549.0001 <.5008 Durbin-Watson 0.0001 <.

However. R2 has dropped to 0. the new value of d.952. The whole-model test plot of the transformed regression correspondingly shows that the fit has become poorer. which states that the residual deviations are mutually independent. Predictive Abilities of the Regression Models Finally. is still much less than the critical value.954 (Model A) in the transformed multiple regression. a tradeoff must be made between the value of d and R2. The federal funds rate and commodity prices also showed a large decrease in their p-values.After the two-stage estimation. and significant autocorrelation still exists (autocorrelation = 0.953. but collinearity would start to become a problem since the lagged residuals are correlated with each other. 0. Because the autocorrelation problem could not be eliminated to an acceptable extent. to test the predictive abilities of our regression analyses. F.5008). this model would most likely not make an accurate forecasting tool. The tested model therefore does not satisfy the third Gauss-Markov assumption. we used the models obtained before and after the two-stage estimation (Model A and Model Atransformed) to predict the values of the TCB 500 within the time range of our data. while d increased from 0.692 to 0.861 from 0. This estimation procedure could have been carried out with more lags. The actual values from WRDS and the values from both prediction models correlated very well as shown by the time series graphs below: 20 .

Our regression model even predicted negative values for the TCB 500! This highlights the fact that our model only works well 21 .Predicted TCB 500 VS Actual TCB 500 (1977-1999) 1400 1200 1000 Predicted TCB 500 by model Real TCB 500 800 600 400 200 0 -200 time (1977-1999) Predicted Transformed TCB500 vs Actual Transformed TCB500 stocks (1977-1999) 500 400 Actual TCB 500 Predicted TCB 500 300 200 100 0 -100 time (1977-1999) We then gathered actual data on our indicators for a period outside the data range we used to derive the models. the larger the variances. We have found that the farther we depart from our original data range. As the graph below shows. the predicted trend is terribly off the mark for the time period 1967-1977.

within the range of our original data and performs poorly in forecasting data outside this range. Real TCB 500 from (1967-1977) 400 350 300 250 index value 200 Model Prediction 150 Real TCB 500 value 100 50 0 0 20 40 60 80 -50 -100 time (1967-1977) 22 100 120 140 160 . Model Prediction VS.

interest rate spread. manufacturing and trade sales. the federal funds rate. CPI. with p < 0. This result is not surprising: the leading indicators are a broad measure of the economy and should move in sync with the stock market. and therefore should correspond with stock prices.426 483. similar to GDP.90972 368. All of these indicators were highly significant. the nine remaining economic indicators were: M2 money supply.0001 <. manufacturing and trade sales are a good indicator of overall economic activity and output.943285 62. the more stocks he/she is likely to buy.508 241 t Ratio 5.042687 23 0.945412 0. The model is shown again below: Response: 500 Stock Summary of Fit RSquare RSquare Adj Root Mean Square Error Mean of Response Observations (or Sum Wgts) Term Intercept M2 Parameter Estimates Estimate Std Error 2744.8281 -0. the four indicators that demonstrated the strongest correlation with stock price were the index of ten leading indicators. unemployment rate. consumer expectations. and personal income. II.316477 0. and the more income an individual has. and commodity prices. capacity utilization rate. manufacturing contracts and orders. Multiple Regression In the final multiple regression model (model A).67 -7.IV.41 Prob>|t| <. CONCLUSION I.0001 .0001. Single Regression From our initial single regression plots. the CPI measures the price level which generally increases with rising aggregate demand. CPI.5% of the variance. and they accounted for approximately 94.

Logically. consumer expectations.0828 4.0001 <.0001 <. and capacity utilization rate and positively correlated with CPI.Intrt Rate Spre UE Rate Capacity Util R Cntrct & Orders CPI Cnsmr Expt FF Rate Comd Prices -30.015183 8.55 6.0001 <.623896 2. Contracts and orders for plant and equipment is a measurement of investment in the economy. their coefficients cannot be compared to evaluate the relative influence of each indicator on the stock index. and bonds would appear more attractive.776534 -5. they had opposite signs. the economy would be in a recession given a high unemployment rate.94 -5.0001 <. Stock prices should be inversely related to interest rates because higher rates imply higher costs of borrowing money. In addition.1658964 -15. The variables M2 and CPI should have a direct relationship as well since money supply growth leads to a proportional rise in the price level. commodity prices. and manufacturing contracts and orders.043872 0. However.32891 0.001375 0.0001 <.85324 -26.0001 <.26 -6. Since not all of these variables are on the same scale. so these two factors are negatively related. M2 would be expected to correlate positively with stocks since it includes money market funds.93 <.70792 -4. higher capacity utilization rates would imply that firms are operating with higher efficiency and output.51 11.608083 5. and it should have been directly correlated with stocks as well.592863 0.37 -5. unemployment rate. the stock market is negatively correlated with M2.42 -4. so they are reasonably correlated with the stock index in this model. and therefore correlates positively with the TCB 500 as well. Increases in CPI and consumer expectation generally imply growing aggregate demand and high confidence in the economy.0001 <.05 14.0001 Based on the model. instead.07294 -68.592589 0. However. it was surprising that indicators such as commodity prices were more 24 .062709 13. interest rates. from an economic perspective.337484 3.

This could be partly due to high autocorrelation problems in the model. the R2 value in our model decreased slightly in return for more significant p-values and more logical coefficients. those four indicators had good polynomial fits with stock prices. It is surprising that given all of the measures of economic performance that we used. but more importantly. it seems futile to attempt to forecast the stock market outside the range using our set of economic indicators. 25 . In addition. a successful prediction model failed to be developed. In fact. which would be assumed to have bigger importance and more impact on the entire economy.significant than variables such as the trade balance. as more variables were eliminated in the refinement process. While the TCB 500 stock index was predicted fairly well by our data within the same time range. it suggests that many other factors contribute to the movement of the equity market than just the economic indicators. but the multiple regression was based on linear relationships. This was the result of the removal of highly dependent variables. CPI was the only one of the four “quality” variables from single regression analysis to remain in the final set of indicators. Multicollinearity was substantial in our preliminary multiple regression since all the indicators are related according to economic theory.

IV. and Personal Income . TCB 500 Against All Indicators APPENDIX B: Polynomial Line Fit For Leading Indicators. CPI. Manufacturing and Trade Sales. SUPPLEMENTS: APPENDIX A: Single Regression Plots.

4906 0.56 0.561e7 611383 10 Leading Ind + 6226.000026 0.4502 Prob>F <.68599 Mean of Response 368.13 -2.0001 Prob>|t| 0.01071 10 Leading Ind^5 0.951879 RSquare Adj 0.508 Observations (or Sum Wgts) 241 Source Model Error C Total Analysis of Variance Sum of Squares Mean Square 15941455 2656909 805906 3444 16747362 DF 6 234 240 Parameter Estimates Estimate Std Error 15611913 7426678 -611383.039863 0.950645 Root Mean Square Error 58.6802 0.0103 .APPENDIX B 500 Stock By 10 Leading Ind 1300 1100 900 800 600 500 300 100 0 90 100 10 Leading Ind Polynomial Fit degree=6 Polynomial Fit degree=6 500 Stock = 1.005017 -0.47785 10 Leading Ind^4 + 0.79 10 Leading Ind^2 + 50.69 0.00003 10 Leading Ind^6 Summary of Fit RSquare 0.00001 Term Intercept 10 Leading Ind 10 Leading Ind^2 10 Leading Ind^3 10 Leading Ind^4 10 Leading Ind^5 10 Leading Ind^6 200 100 0 -100 -200 90 100 10 Leading Ind t Ratio 2.4847 10 Leading Ind^3 1.7869 9018.6 6226.0366 0.477852 1.1 391548.339 50.484734 122.1198 0.59 F Ratio 771.10 -1.3188 -1.41 -1.1566 0.42 2.0107058 0.0339 0.

0317 0.194856 0.86e-11 -4.59 2.0182 0.80 -3.87e-30 F Ratio 2338.983174 Root Mean Square Error 34.321316 -0.32132 Mnfr & Trade Sales 0.00001 Mnfr & Trade Sales^2 + 2.72 1.38 -2.5 1.05e-23 2.9e-23 Mnfr & Trade Sales^5 8.0030 .01e-17 2.1 2.508 Observations (or Sum Wgts) 241 Source Model Error C Total DF 6 234 240 Term Intercept Mnfr & Trade Sales Mnfr & Trade Sales^2 Mnfr & Trade Sales^3 Mnfr & Trade Sales^4 Mnfr & Trade Sales^5 Mnfr & Trade Sales^6 Analysis of Variance Sum of Squares Mean Square 16472623 2745437 274738 1174 16747362 Parameter Estimates Estimate -195090.0532 0.96e-30 t Ratio -1.9e-30 Mnfr & Trade Sales^6 Summary of Fit RSquare 0.APPENDIX B 500 Stock By Mnfr & Trade Sales 1300 1100 900 800 600 500 300 100 0 400000 500000 600000 700000 Mnfr & Trade Sales 800000 Polynomial Fit degree=6 Polynomial Fit degree=6 500 Stock = -195090 + 2.0001 Std Error 113131.9e-11 Mnfr & Trade Sales^3 4e-17 Mnfr & Trade Sales^4 + 2.55e-17 1.2e-11 1.343 Prob>F <.0055 0.26507 Mean of Response 368.94 -2.000011 2.945e-23 -8.000005 1.983595 RSquare Adj 0.0101 0.0859 0.00 700000 800000 100 0 -100 400000 500000 600000 Mnfr & Trade Sales Prob>|t| 0.16 2.

2916 34.50537 CPI^3 + 0.3338 CPI^2 0.37 1.23 16028.1730 0.85e8 CPI^6 Summary of Fit RSquare 0.0040617 0.508 Observations (or Sum Wgts) 241 Source Model Error C Total Analysis of Variance Sum of Squares Mean Square 16569482 2761580 177879 760 16747362 DF 6 234 240 Parameter Estimates Estimate Std Error 17244.08 -1.236511 0.0866 0.261 883.854 Prob>F <.14 2.989106 Root Mean Square Error 27.505366 0.989379 RSquare Adj 0.APPENDIX B 500 Stock By CPI 1300 1100 900 800 600 500 300 100 0 60 70 80 90 100 120 CPI 140 160 Polynomial Fit degree=6 Polynomial Fit degree=6 500 Stock = 17244.75 F Ratio 3632.2 1207.000005 2.57115 Mean of Response 368.0001 Prob>|t| 0.00002 CPI^5 + 2.333804 19.95 -0.72 -2.62 -3.8484e-8 7.0002 100 50 0 -50 -100 60 70 80 90 100 110 120 130 140 150 160 170 CPI .91 -1207.0018 0.2831 0.26 CPI + 34.001553 -0.0337 0.6e-9 Term Intercept CPI CPI^2 CPI^3 CPI^4 CPI^5 CPI^6 t Ratio 1.15 3.000017 0.00406 CPI^4 0.0095 0.

98946 Mean of Response 368.76 -2.APPENDIX B 500 Stock By Pers Inc 1300 1100 900 800 600 500 300 100 0 3500 4000 4500 5000 Pers Inc 5500 6000 Polynomial Fit degree=6 Polynomial Fit degree=6 500 Stock = -523578 + 733.08 -3.0705 -0.479 Prob>F <.986238 Root Mean Square Error 30.0024 0.16 F Ratio 2867.42589 Pers Inc^2 + 0.0001311 0.059e-12 6.8e-17 Pers Inc^6 Summary of Fit RSquare 0.986582 RSquare Adj 0.69 2.69489 266.83 2.0001 Prob>|t| 0.695 Pers Inc 0.0040 0.548e-9 2.0063 0.0050 0.91 -2.5 194766.7e-13 -7.1e12 Pers Inc^5 7.150455 0.99 3.26e-8 Pers Inc^4 + 2.0018 100 50 0 -50 -100 3500 4000 4500 Pers Inc 5000 5500 6000 .46e-17 Term Intercept Pers Inc Pers Inc^2 Pers Inc^3 Pers Inc^4 Pers Inc^5 Pers Inc^6 t Ratio -2.0031 0.00013 Pers Inc^3 2.78e-17 2.508 Observations (or Sum Wgts) 241 Source Model Error C Total DF 6 234 240 Analysis of Variance Sum of Squares Mean Square 16522641 2753773 224721 960 16747362 Parameter Estimates Estimate Std Error -523578.000045 -2.0077 0.256e-8 7.425889 0.6 733.

l), is deﬁned as a status that exists as long as all lives survive and fails upon the ﬁrst death. The time-until-failure of the joint-life status is deﬁned as
T(x1,x2,··· ,xn) = min[T(x1),T(x2),... ,T(xn)],
which is the time-until-death of the life who ﬁrst dies. In this paper we restrict our attention to the two-life case, and assume they are independent. In actuarial science and demography, one important approach to describe the survival pattern is the force of mortality. We use µ(t) to denote the group’s force of mortality. It is deﬁned mathematically as µ(t) = fX(t) 1 − FX(t) ,t ∈ [0,∞) ursarismurphy

by Lenin Starlin

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