Applied Financial Econometrics

Examples from Topic 4

Hurn, Martin, Phillips & Yu (2020) Chapter 4

Semester 2, 2023/24

Applied Financial Econometrics Topic 4 examples Semester 2, 2023/24 1 / 14

 Equity and dividend returns

Equity and dividend returns

Applied Financial Econometrics Topic 4 examples Semester 2, 2023/24 2 / 14

 Equity and dividend returns

The data

. // =============================================================================
. // pv.dta - The dataset contains monthly data for the period January 1871
. // to December 2013 on the S&P Composite price, dividend, earnings and CPI.
. // =============================================================================

. use "$data\pv.dta", clear

.
. // Set time
. format datevec %tm

. tsset datevec

Time variable: datevec, 1871m1 to 2016m9

Delta: 1 month

Applied Financial Econometrics Topic 4 examples Semester 2, 2023/24 3 / 14

 Equity and dividend returns

Generating returns

. gen lprice = log(price)

. gen re = 100 * D.lprice

(1 missing value generated)

. label variable re "Equity return"

.
. gen ldividend = log(dividend)

. gen rd = 100 * D.ldividend

(1 missing value generated)

. label variable rd "Dividend return"

Applied Financial Econometrics Topic 4 examples Semester 2, 2023/24 4 / 14

 Equity and dividend returns

y = equity returns, x = lags of equity returns

. var re rd, lags(1/6)

Vector autoregression

Sample: 1871m8 thru 2016m9 Number of obs = 1,742

Log likelihood = -6055.046 AIC = 6.981683
FPE = 3.691117 HQIC = 7.01183
Det(Sigma_ml) = 3.582561 SBIC = 7.063217

Equation Parms RMSE R-sq chi2 P>chi2

----------------------------------------------------------------
re 13 3.87379 0.1022 198.3696 0.0000
rd 13 .492858 0.8105 7451.493 0.0000
----------------------------------------------------------------

------------------------------------------------------------------------------
| Coefficient Std. err. z P>|z| [95% conf. interval]
-------------+----------------------------------------------------------------
re |
re |
L1. | .2974469 .023962 12.41 0.000 .2504822 .3444117
L2. | -.0697855 .0249319 -2.80 0.005 -.1186511 -.0209199
L3. | -.0294469 .0250197 -1.18 0.239 -.0784847 .0195908
L4. | .0297963 .0250204 1.19 0.234 -.0192428 .0788353
L5. | .0518887 .0249504 2.08 0.038 .0029868 .1007906
L6. | -.0047881 .0241616 -0.20 0.843 -.052144 .0425677

continued on the next slide

Applied Financial Econometrics Topic 4 examples Semester 2, 2023/24 5 / 14

 Equity and dividend returns

y = equity returns, x = lags of dividend returns

|
rd
|
L1.
| -.0489102 .1874109 -0.26 0.794 -.4162288 .3184084
L2.
| .5190891 .2539964 2.04 0.041 .0212652 1.016913
L3.
| -.2482353 .2504118 -0.99 0.322 -.7390334 .2425629
L4.
| .3181172 .2505846 1.27 0.204 -.1730195 .809254
L5.
| -.2310433 .2542543 -0.91 0.364 -.7293727 .267286
L6.
| -.3409726 .1857115 -1.84 0.066 -.7049605 .0230153
|
_cons | .26385 .0974028 2.71 0.007 .072944 .4547561
-------------+----------------------------------------------------------------

continued on the next slide

Applied Financial Econometrics Topic 4 examples Semester 2, 2023/24 6 / 14

 Equity and dividend returns

y = dividend returns, x = lags of equity returns

-------------+----------------------------------------------------------------
rd |
re |
L1. | .0009444 .0030487 0.31 0.757 -.0050308 .0069197
L2. | .0073819 .0031721 2.33 0.020 .0011648 .013599
L3. | .0080699 .0031832 2.54 0.011 .0018309 .0143089
L4. | .0021224 .0031833 0.67 0.505 -.0041168 .0083616
L5. | .0116906 .0031744 3.68 0.000 .0054689 .0179124
L6. | .013636 .003074 4.44 0.000 .007611 .019661
|

continued on the next slide

Applied Financial Econometrics Topic 4 examples Semester 2, 2023/24 7 / 14

 Equity and dividend returns

y = dividend returns, x = lags of dividend returns

rd
|
L1.
| .9099498 .023844 38.16 0.000 .8632163 .9566832
L2.
| .0160166 .0323156 0.50 0.620 -.0473209 .0793541
L3.
| -.2520219 .0318596 -7.91 0.000 -.3144655 -.1895783
L4.
| .2236389 .0318816 7.01 0.000 .1611522 .2861256
L5.
| .0157664 .0323485 0.49 0.626 -.0476354 .0791682
L6.
| -.022768 .0236278 -0.96 0.335 -.0690777 .0235418
|
_cons | .0172414 .0123924 1.39 0.164 -.0070473 .0415301
------------------------------------------------------------------------------

Applied Financial Econometrics Topic 4 examples Semester 2, 2023/24 8 / 14

 Equity and dividend returns

Impulse responses

qui var re rd, lags(1/6)

irf set "topic_irf.irf", replace
irf create irf, replace step(30) order(re rd)

irf graph oirf, irf(irf) impulse(re) response(re) individual ///

title("Equity response to equity shock", size(medsmall) ) ///
xtitle("Forecast Horizon" ) ///
ylab( ,angle(0) format(%3.1f) ) ///
legend(off)
gr_edit .subtitle.draw_view.setstyle, style(no)
graph export demo_irfg1.pdf, replace

Applied Financial Econometrics Topic 4 examples Semester 2, 2023/24 9 / 14

 Equity and dividend returns

Impulse responses, equity response to equity shock

We use the code block irf graph and specify impulse(re) response(re)
Equity response to equity shock
4.0

3.0

2.0

1.0

0.0

0 10 20 30
Forecast Horizon

Applied Financial Econometrics Topic 4 examples Semester 2, 2023/24 10 / 14

 Equity and dividend returns

Impulse responses, equity response to equity shock

We use the code block irf graph and specify impulse(re) response(rd)
Dividend response to equity shock
0.2

0.1

0.0

-0.1

0 10 20 30
Forecast Horizon

Applied Financial Econometrics Topic 4 examples Semester 2, 2023/24 11 / 14

 Equity and dividend returns

Impulse responses, equity response to dividend shock

We use the code block irf graph and specify impulse(rd) response(re)
Equity response to dividend shock

0.4

0.2

0.0

-0.2

0 10 20 30
Forecast Horizon

Applied Financial Econometrics Topic 4 examples Semester 2, 2023/24 12 / 14

 Equity and dividend returns

Impulse responses, equity response to dividend shock

We use the code block irf graph and specify impulse(rd) response(rd)
Dividend response to dividend shock
0.6

0.4

0.2

0.0

0 10 20 30
Forecast Horizon

Applied Financial Econometrics Topic 4 examples Semester 2, 2023/24 13 / 14

 Equity and dividend returns

Variance decomposition

To perform the variance decomposition, estimate

qui var re rd, lags(1/6)
irf set "topic_irf.irf", replace
irf create irf, replace step(30) order(re rd)
And then,
irf table fevd for the table
irf graph fevd for decomposition graphs (similar to IRF graphs)

Applied Financial Econometrics Topic 4 examples Semester 2, 2023/24 14 / 14