We would like to see whether an economy’s interest rate and output can affect the share

price.

a. Using the data in Table 4.1, regress the share price on interest rate, output, and a
constant term.
Dependent Variable: SHAREP
Method: Least Squares
Date: 03/24/22 Time: 13:57
Sample: 1995Q1 2000Q4
Included observations: 24

Variable Coefficient Std. Error t-Statistic Prob.

C 2013.982 672.7688 2.993572 0.0069

INTEREST -46.09010 40.83692 -1.128638 0.2718
OUTPUT -7.596901 4.172455 -1.820727 0.0829

R-squared 0.137515 Mean dependent var 853.8283

Adjusted R-squared 0.055373 S.D. dependent var 248.9405
S.E. of regression 241.9500 Akaike info criterion 13.93181
Sum squared resid 1229336. Schwarz criterion 14.07906
Log likelihood -164.1817 Hannan-Quinn criter. 13.97087
F-statistic 1.674122 Durbin-Watson stat 0.308431
Prob(F-statistic) 0.211540

Share P=2013.982-46.0910 Interest-7.5969 Output

b. In addition, the Asian Financial Crisis hit Malaysia in 3rd quarter of 1997, thus this
may cause instability of the model. Repeat the regression by adding a dummy
variable, DCrisis where DCrisis = 1 if after 1997 Quarter 2 and 0 otherwise.
Dependent Variable: SHAREP
Method: Least Squares
Date: 03/24/22 Time: 13:54
Sample: 1995Q1 2000Q4
Included observations: 24

Variable Coefficient Std. Error t-Statistic Prob.

C 892.0423 344.8065 2.587081 0.0176

INTEREST -30.83148 19.44358 -1.585689 0.1285
OUTPUT 3.584939 2.369934 1.512675 0.1460
DRISIS -529.1100 61.75105 -8.568438 0.0000

R-squared 0.815349 Mean dependent var 853.8283

Adjusted R-squared 0.787652 S.D. dependent var 248.9405
S.E. of regression 114.7149 Akaike info criterion 12.47379
Sum squared resid 263190.0 Schwarz criterion 12.67013
Log likelihood -145.6855 Hannan-Quinn criter. 12.52588
F-statistic 29.43757 Durbin-Watson stat 1.640570
Prob(F-statistic) 0.000000

ShareP= 892.0432+ 30.8314 Interest+ 3.5849 Output- 529.1100 DCrisis

c. Since the data used is quarterly data, there may have seasonal effect in our data.
Consider:
Share Price = f (Interest Rate, Output, DCrisis, DQ2, DQ3, DQ4)

Where, DCrisis=1 if after 1997 Quarter 2 & 0 otherwise;

DQ2=1 if quarter 2 & 0 otherwise;
 DQ3=1 if quarter 3 & 0 otherwise;
DQ4=1 if quarter 4 & 0 otherwise;

Regress the share price on interest rate, output, DCrisis, DQ2, DQ3, DQ4 and a
constant term.
Dependent Variable: SHAREP
Method: Least Squares
Date: 03/24/22 Time: 14:05
Sample: 1995Q1 2000Q4
Included observations: 24

Variable Coefficient Std. Error t-Statistic Prob.

C 819.5996 365.6229 2.241653 0.0386

INTEREST -26.40842 20.52114 -1.286888 0.2154
OUTPUT 4.383178 2.565112 1.708766 0.1057
DCRISIS -529.9391 64.17042 -8.258308 0.0000
DQ2 -34.06008 69.00144 -0.493614 0.6279
DQ3 -83.35818 70.18649 -1.187667 0.2513
DQ4 -69.63776 72.02669 -0.966833 0.3472

R-squared 0.831597 Mean dependent var 853.8283

Adjusted R-squared 0.772161 S.D. dependent var 248.9405
S.E. of regression 118.8255 Akaike info criterion 12.63168
Sum squared resid 240031.5 Schwarz criterion 12.97528
Log likelihood -144.5802 Hannan-Quinn criter. 12.72284
F-statistic 13.99140 Durbin-Watson stat 1.686155
Prob(F-statistic) 0.000010

ShareP= 819.5996- 26.4084 Interest+ 4.3831 Output- 529.9391 DCrisis- 34.0600 DQ2-
83.3581 DQ3- 69.6377 DQ4

c. Make comparison between the models. (Eg. Which dummy variables are statistically
significant at 5% significance level? What is the overall significance of the estimated
regression? How well is the estimated regression line fits the data?)
Adjusted R2 for model 1= 0.0553
Adjusted R2 for model 2= 0.7876
Adjusted R2 for model 3= 0.7721

H0:βInterest=βOutput=0
H1:at least one βi≠0
P-value (F-test) for model 1= 0.2115 (>0.05)
Failed to reject H0
The model is overall not significant at 5% significance level.

H0:βInterest=βOutput=βdcrisis=0
H1:at least one βi≠0
(i= Interest, Output, dcrisis)
P= 0 (<0.05)
Reject H0
The model is overall significant at 5% significance level.

H0:βInterest=βOutput=βdcrisis=βdq2=βdq3=βdq4=0
H1:at least one βi≠0
(i= Interest, Output, dcrisis, dq2, dq3, dq4)
P= 0 (<0.05)
Reject H0
The model is overall significant at 5% significance level.

H0:βdcrisis=0
H1:βdcrisis≠0
Q-value (T-test) for Dcrisis= 0.0000 (>0.05)
Reject H0.
Dcrisis is significant at 5% significant level.

H0:βdq2=0
H1:βdq2i≠0
R-value (T-test) for DQ2= 0.6279 (>0.05)
Failed to reject H0.
DQ2 is not significant at 5% significant level.

H0:βdq3=0
H1:βdq3≠0
P-value (T-test) for DQ3= 0.2513 (>0.05)
Failed to reject H0.
DQ3 is not significant at 5% significant level.

H0:βdq4=0
H1:βdq4≠0
P-value (T-test) for DQ4= 0.3472 (>0.05)
Failed to reject H0.
DQ4 is not significant at 5% significant level.

The best model is model, increase R2, significance F-test, significance Dcrisis.

Table 4.1

year  sharep interest output

1995Q1 984.07 5.03 97.02
1995Q2 1026.62 5.41 102.43
1995Q3 1000.6 5.56 103.57
 1995Q4 995.17 6.02 106.66
1996Q1 1149.08 6.28 104.45
1996Q2 1136.31 6.32 104.3
1996Q3 1135.27 6.54 114.95
1996Q4 1237.96 6.51 117.37
1997Q1 1203.1 6.29 116.36
1997Q2 1077.3 6.43 117.14
1997Q3 814.57 6.2 123.56
1997Q4 594.44 6.7 128.02
1998Q1 719.5 5.95 116.36
1998Q2 455.64 8.88 110.4
1998Q3 373.52 6.93 110.09
1998Q4 586.13 5.7 115.73
1999Q1 502.82 5.43 119.57
1999Q2 811.1 3.1 120.66
1999Q3 675.45 2.84 131.31
1999Q4 812.33 2.73 134.52
2000Q1 974.38 2.75 140.51
2000Q2 833.37 2.76 149.07
2000Q3 713.51 3.11 155.4
2000Q4 679.64 2.98 158.52

sharep = Share price

interest= Interest rate
output = Output