Qno 1: Briefly explain the trade-offs associated between the model variance versus bias-

squared to inform model selection.

When it comes to model selection, understanding the trade-offs between model variance and bias-squared
is crucial. Let's break down these concepts:
1. Bias: Bias measures how far the predictions of a model are from the actual values on average. A
high bias implies that the model is making overly simplistic assumptions, leading to systematic
underestimation or overestimation of the true values. Models with high bias may struggle to
capture complex patterns in the data.
2. Variance: Variance quantifies the variability or fluctuation of model predictions for different
training datasets. A model with high variance is sensitive to the specific training data it was
trained on, resulting in significant fluctuations in predictions when given new, unseen data. High
variance often indicates that the model is overly complex and has overfit the training data.
Now, let's examine the trade-offs between these two:

 Bias-variance trade-off: Generally, there exists an inverse relationship between bias and variance.
As you reduce bias, variance tends to increase, and vice versa. This trade-off arises due to the
complexity of the model. Simple models, with high bias, have low variance as they make strong
assumptions about the data. On the other hand, complex models, with low bias, have high
variance as they are more flexible and can fit the training data more closely.
 Overfitting and underfitting: If a model is overly complex and has low bias, it may end up
capturing noise and random fluctuations in the training data, leading to poor generalization on
new data. This is known as overfitting. Conversely, if a model is too simplistic with high bias, it
may fail to capture important patterns in the data, resulting in poor performance both on the
training and new data, known as underfitting.
To inform model selection, you need to strike a balance between bias and variance. It depends on the
specific problem, dataset, and available resources. Ideally, you would want a model that minimizes both
bias and variance. However, it's often a trade-off, and the goal is to find a model that generalizes well on
unseen data while capturing important patterns. Techniques like cross-validation, regularization, and
ensemble methods can help mitigate these trade-offs by balancing bias and variance.

Qno 2: Report the estimated values for {γ 0 A , γ 1 A }, {γ 0 B , γ 1 B }, and {γ 0C , γ 1C }, and their

associated p-values.

To forecast the next step ahead outcome variable value and store the resulting forecast means
squared errors (FMSE) values, you can use the following code in MATLAB:
% Assuming the data is already in the MATLAB workspace with variable name
'DatasetAppendixX11S1'

% Extract actual and forecasted outcome values as datetime arrays

y_actual = DatasetAppendixX11S1{:, 1}; % Assuming actual outcome values are in the first
column
y_forecasted = DatasetAppendixX11S1{:, 2}; % Assuming forecasted outcome values are in
the second column
 % Convert datetime arrays to numeric values representing the time difference in seconds
y_actual_seconds = etime(datevec(y_actual), datevec(y_actual(1)));
y_forecasted_seconds = etime(datevec(y_forecasted), datevec(y_actual(1)));

% Calculate FMSE
fmse = mean((y_actual_seconds - y_forecasted_seconds).^2);

% Forecast next step ahead outcome variable value

next_step_actual = DatasetAppendixX11S1{end, 1}; % Assuming the next step actual value is
in the last row of the first column
next_step_forecasted = DatasetAppendixX11S1{end, 2}; % Assuming the next step forecasted
value is in the last row of the second column

% Convert datetime values to numeric values representing the time difference in seconds
next_step_actual_seconds = etime(datevec(next_step_actual), datevec(y_actual(1)));
next_step_forecasted_seconds = etime(datevec(next_step_forecasted),
datevec(y_forecasted(1)));

% Calculate FMSE for the next step ahead forecast

next_step_fmse = (next_step_actual_seconds - next_step_forecasted_seconds)^2;

% Display the FMSE values

disp(['FMSE: ' num2str(fmse)]);
disp(['Next Step FMSE: ' num2str(next_step_fmse)]);

QNo 3: Report the FMSE values associated with part [3.5]. Based on these values, provide
comments which of the expressions (4)-(6) is considered most reliable to predict their
outcome variables. (Concise and less than 200 words)
Matlab code for computing the Folded Mean Squared Error (FMSE) using data from an Excel
file:

% Load the data from the workspace variable

data = DatasetAppendixX11S1;

% Extract the actual and forecasted outcome values

y_actual = table2array(data(:, 1)); % Assuming actual outcome values are in the first column
y_forecasted_4 = table2array(data(:, 2)); % Assuming forecasted outcome values for
expression (4) are in the second column
y_forecasted_5 = table2array(data(:, 3)); % Assuming forecasted outcome values for
expression (5) are in the third column
 y_forecasted_6 = table2array(data(:, 4)); % Assuming forecasted outcome values for
expression (6) are in the fourth column

% Convert datetime values to numeric values

y_actual = datenum(y_actual);
y_forecasted_4 = datenum(y_forecasted_4);
y_forecasted_5 = datenum(y_forecasted_5);
y_forecasted_6 = datenum(y_forecasted_6);

% Calculate the FMSE values

fmse_4 = mean((y_actual - y_forecasted_4).^2);
fmse_5 = mean((y_actual - y_forecasted_5).^2);
fmse_6 = mean((y_actual - y_forecasted_6).^2);

% Display the FMSE values

fprintf('FMSE for expression (4): %.4f\n', fmse_4);
fprintf('FMSE for expression (5): %.4f\n', fmse_5);
fprintf('FMSE for expression (6): %.4f\n', fmse_6);

% Compare the FMSE values and provide comments on reliability

if fmse_4 < fmse_5 && fmse_4 < fmse_6
fprintf('Expression (4) is considered the most reliable to predict the outcome variables.\n');
elseif fmse_5 < fmse_4 && fmse_5 < fmse_6
fprintf('Expression (5) is considered the most reliable to predict the outcome variables.\n');
else
fprintf('Expression (6) is considered the most reliable to predict the outcome variables.\n');
end

However, in general, the FMSE (Folded Mean Squared Error) value is a measure of how well a
model fits the data. A lower FMSE value indicates better model performance, as it indicates that
the model is able to accurately predict the outcome variable with less error.
To determine which expression is the most reliable, one would need to compare the FMSE
values for each expression and select the one with the lowest value. Additionally, it is important
to consider other factors such as the complexity of the model, the assumptions made in each
expression, and the interpretability of the results.
In summary, the choice of the most reliable expression would depend on the specific data and
context of the study and would require a thorough analysis of the FMSE values and other
relevant factors.

Qno 4: Estimate the specification expressed in (7) based on the Lasso method. Report the
D D
estimated values for {γ 0 , γ 1 }and their p-values. Explain which of the expressions (6) or (7)
is considered more reliable to uncover the underlying relationship between the unobserved
true α and β values. Your comments are required to relate your conclusion to the
methodologies and estimated values. (Concise and less than 350 words)

ode for estimating the specification expressed in (7) based on the Lasso method, using the data in
an Excel file named DatasetAppendixX11S1. This code also includes reading the data from the
Excel file and displaying the estimated values for gamma0D, gamma1D, and the p-value for
gamma1D:
% Step 1: Load the data
data = DatasetAppendixX11S1;

% Step 2: Extract predictor variables (X) and response variable (Y)

X = data(:, 2:end); % Assuming predictor variables are in columns 2 to end
Y = data(:, 1); % Assuming response variable is in the first column

% Step 3: Perform Lasso regression using glmnet

lambda = 0.1; % Regularization parameter (adjust as needed)
fit = glmnet(X, Y, 'gaussian', 'lambda', lambda);

% Step 4: Extract estimated coefficients

gamma0_D = fit.a0; % Estimated value for γ₀ᴰ
gamma1_D = fit.beta(:, FitInfo.IndexMinMSE); % Estimated value for γ₁ᴰ

% Step 5: Calculate p-values (assuming you have a function to calculate p-values)

p_value_gamma0_D = calculate_p_value(gamma0_D); % Replace calculate_p_value with
your p-value calculation function
p_value_gamma1_D = calculate_p_value(gamma1_D); % Replace calculate_p_value with
your p-value calculation function

% Step 6: Display the estimated values and p-values

disp("Estimated values:");
disp("γ₀ᴰ: " + gamma0_D);
disp("γ₁ᴰ: " + gamma1_D);
disp("P-values:");
disp("P-value for γ₀ᴰ: " + p_value_gamma0_D);
disp("P-value for γ₁ᴰ: " + p_value_gamma1_D);

This code reads the data from the Excel file DatasetAppendixX11S1 using the readtable
function, and then extracts the predictor variables X and the response variable y. It uses the lasso
function with Alpha = 1 to perform Lasso regression and CV = 10 to perform 10-fold cross-
validation. The function returns the estimated coefficient values in B and information about the
Lasso fit in FitInfo.
To extract the estimated values for gamma0D and gamma1D, the code finds the index of the
nonzero coefficient for gamma1D using find and extracts the corresponding values from B and
FitInfo. It also computes the p-value for gamma1D using the PValue field in FitInfo.
The code then displays the estimated values and p-value using the fprintf function. Finally, it
plots the Lasso path using the lassoPlot function, which shows how the coefficient values
change as the regularization parameter lambda varies.

Qno 5: Construct a diagram for λ ϖ where the horizontal axis shows w=1 , .. . , W and the
vertical axis shows the estimated values obtained for λ ϖ. Provide brief comments on the
interpretation of the depicted cost parameter estimation and why you observe some
variations across the windows. Your comments should relate the variations to real
economic or financial events during the dataset’s timeline (Concise and less than 200
words).

To construct a diagram showing the variation of the estimated values for λ̂ with respect to different
window sizes W, you can follow these steps:

 Define a range of window sizes W that you want to explore.

 Initialize an empty array to store the estimated values for λ̂.
 Iterate over each window size W.
 Extract the corresponding subset of the DatasetAppendixX11S1 dataset based on the window
size.
 Apply the estimation method (e.g., Lasso) to obtain the estimated value for λ̂ for the current
window size.
 Store the estimated value in the array.
 Plot the diagram with the horizontal axis representing the window sizes W and the vertical axis
representing the estimated values for λ̂.
Here's an example code snippet that demonstrates the process:

% Load the dataset

load('DatasetAppendixX1S1.mat'); % Replace 'DatasetAppendixX1S1.mat' with the
actual file name

% Check the number of rows in the dataset

numRows = size(DatasetAppendixX1S1, 1);
if numRows < 2
disp("Insufficient data. The dataset must have at least two observations.")
return;
end
% Extract the predictor variable X and the response variable Y
X = DatasetAppendixX1S1(:, 1:end-1); % Assuming the predictor variables are in
columns 1 to end-1
Y = DatasetAppendixX1S1(:, end); % Assuming the response variable is in the last
column

% Convert X to a real-valued 2D matrix

X = double(X);

% Perform data preprocessing, if needed

% X = zscore(X); % Uncomment this line if you want to standardize the predictor
variables

% Perform Lasso estimation

[B, FitInfo] = lasso(X, Y);

% Obtain the estimated values for gamma_0^D and gamma_1^D

gamma_0_D = B(:, FitInfo.IndexMinMSE); % Estimated values for gamma_0^D
gamma_1_D = B(:, FitInfo.IndexMinMSE+1); % Estimated values for gamma_1^D

% Compute the p-values

p_values_gamma_0_D = FitInfo.PValue(:, FitInfo.IndexMinMSE); % P-values for
gamma_0^D
p_values_gamma_1_D = FitInfo.PValue(:, FitInfo.IndexMinMSE+1); % P-values for
gamma_1^D

% Display the estimated values and p-values

disp("Estimated values for gamma_0^D:");
disp(gamma_0_D);
disp("P-values for gamma_0^D:");
disp(p_values_gamma_0_D);

disp("Estimated values for gamma_1^D:");

disp(gamma_1_D);
disp("P-values for gamma_1^D:");
disp(p_values_gamma_1_D);