Alpha University College 1

Applied Econometrics for Accounting and Finance

Assignment # 1 – August 2023

Instruction: All discussions should be hand-written, while EViews outputs should be print-
outs. Each group member is expected to actively engage in solving the problems.

1. The data ‘MSE data for assignment may 2023’ pertain to several characteristics of a random
sample of Micro- and Small Enterprises (MSE). The variables considered are:

Variable Description Coding

business_license Do you have business license or certificate? 0 = No, 1 = Yes
Have you obtained loan from any micro finance
0 = No, 1 = Yes
loan institution?
Have you ever received land or working
0 = No, 1 = Yes
land_premise premises for your enterprise?
util_rate Enterprise's current capacity utilization rate Actual data
current_capital Current capital (in birr) Actual data
initial_capital Initial capital (in birr) Actual data
years_establish Years since establishment Actual data
no_paid_workers Number of paid workers Actual data
1 = Metal and woodwork
2 = Construction
3 = Agro-processing
subsector Sub-sector of MSE 4 = Textile and garment
5 = Leather and footwear
6 = Retail
7 = Urban agriculture

Each group is expected to work on the data corresponding to its three sub-sectors as shown below:

Group # Sectors for each group

Group 1 1, 2 and 3
Group 2 1, 2 and 6
Group 3 1, 3 and 6
Group 4 2, 3 and 4
Group 5 2, 3 and 6
Group 6 1, 3 and 7
Group 7 2, 3 and 5
Group 8 2, 3 and 7
Group 9 3, 4 and 7
Group 10 3, 4 and 5
Group 11 2, 5 and 6
Group 12 1, 2 and 4
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Estimate a multiple linear regression model in which the dependent variable is current capital
(CC) and the independent (explanatory) variables are: initial capital (IC), sub-sector dummies,
business license (BL), access to loan from micro finance institutions (LOAN), access to
land/working premises (LAND), capacity utilization rate (CUR), years since establishment
(YSE) and number of paid workers (NPW).
a) Write down the population (true) regression model.
b) Write down the fitted regression model.
c) What percent of the variation in current capital is explained by the independent variables?
d) Discuss the ANOVA result (the F-test). Express the necessary hypotheses symbolically.
e) Which of the explanatory variables are significant predictors of current capital?
f) Interpret the estimated regression coefficients for the significant continuous regressors.
g) Do the same for dummy (qualitative) regressors. Also discuss the meaning (implication) of
each of the insignificant dummy variables.

EViews procedure
Import the data into EViews. First specify the subsectors to be included in the analysis. For
example, if the subsectors your group is going to work on are 1, 3 and 6, click on sample and
type the following in the box under ‘IF condition (optional)’:
subsector = 1 or subsector =3 or subsector =6

To construct a dummy variable for subsector 1, click on Genr and type the following:
Dummy1 = @recode(subsector=1, 1, 0)

Also construct a dummy variable for subsector 3 as:

Dummy2 = @recode(subsector=3, 1, 0)

Subsector 6 will be the reference category.

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2. Consider the data on the excess returns of Ford, General Electric, Microsoft and Oracle
together with the excess returns on Standard & Poor’s (S&P 500) stock market index from
February 2002 to April 2013 (‘Asset returns data for assignment may 2023’). Each group is
expected to construct a simple linear regression model (CAPM) for the specified assets and
time periods shown below.

Group # Sectors for each group

Group 1 Ford: Feb. 2002 to April 2013
Group 2 Ford: Feb. 2003 to April 2013
Group 3 Ford: Feb. 2004 to April 2013
Group 4 Microsoft: Feb. 2005 to April 2013
Group 5 Microsoft: Feb. 2002 to April 2013
Group 6 Microsoft: Feb. 2003 to April 2013
Group 7 General Electric: Feb. 2004 to April 2013
Group 8 General Electric: Feb. 2005 to April 2013
Group 9 General Electric: Feb. 2002 to April 2013
Group 10 Oracle: Feb. 2003 to April 2013
Group 11 Oracle: Feb. 2004 to April 2013
Group 12 Oracle: Feb. 2005 to April 2013

a) Obtain a scatter plot of asset returns versus market returns. Does the plot indicate an
approximate linear relationship between the two?
b) Estimate a capital-asset pricing model. Write down the fitted regression model.
c) Is there a significant linear relationship between asset returns and returns on the market
index? Test the same by specifying the null and alternative hypotheses symbolically.
Interpret your result.
d) Is the CAPM ‘beta’ significantly greater than one? State the necessary hypotheses
symbolically and test the same. What is the implication of the result?

3. Discuss briefly the following

a) What is the difference between regression and correlation?

b) What is ordinary least square?

c) What is the role of the error term ui in regression analysis?

d) How do you interpret the intercept?

e) How do you interpret the R2?