PROJECT REPORT ON FINANCIAL

BUSINESS MODELLING
AIM: - To develop an econometric model for spot price of an asset, using future price of
same commodity.
OBJECTIVE:- To find optimal hedge ratio.
To check for CLRM assumptions.
Time series analysis of spot and future prices data.
COMMODITY: COPPER
Period of data: 5 years (July 2008- July 2013)
Source: Multi Commodity Exchange (www.mcxindia.com)
Total data set : 1799
For Spot Data:-

For Future Data:-

ANALYSIS
Scatter diagram
.12

.08

SPOT_Y_=0.0002354+0.032*FUTURE_X_

spot(y)

.04

.00

-.04

-.08

-.12
-.12

-.08

-.04

.00

.04

.08

.12

future(x)

Inference :- The intercept is 0.0002354 and Slope is 0.032. As the slope is very small, the
correlation is very less.
Inference :

FUTURE_X_
0.000261
0.000531
0.099706
-0.106688
0.016729
-0.254114
7.170110

SPOT_Y_
0.000244
0.000000
0.100096
-0.115489
0.019595
-0.151412
6.562226

Jarque-Bera
Probability

1322.873
0.000000

958.0541
0.000000

Sum
Sum Sq. Dev.

0.468900
0.503193

0.438549
0.690340

Observations

1799

1799

Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis

Regression
Dependent Variable: SPOT_Y_
Method: Least Squares
Date: 11/24/13 Time: 18:18
Sample (adjusted): 3 1801
Included observations: 1799 after adjustments
Variable

Coefficient

Std. Error

t-Statistic

Prob.

C
FUTURE_X_

0.000235
0.032001

0.000462
0.027620

0.509606
1.158618

0.6104
0.2468

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)

0.000746
0.000190
0.019593
0.689825
4523.070
1.342395
0.246766

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat

0.000244
0.019595
-5.026203
-5.020095
-5.023948
2.214350

Analysis Optimal hedge ratio is 0.032001 and effectiveness is 0.074%.

As the value of R-square is very less, thus there is very less correlation between the
dependent and independent variable.
DW Stats is 2.214, it means that there is no autocorrelation.
Heteroskedasticity Test: White
F-statistic
Obs*R-squared
Scaled explained SS

40.34988
77.35861
211.5330

Prob. F(2,1796)
Prob. Chi-Square(2)
Prob. Chi-Square(2)

0.0000
0.0000
0.0000

Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 11/24/13 Time: 18:21
Sample: 3 1801
Included observations: 1799
Variable

Coefficient

Std. Error

t-Statistic

Prob.

C
FUTURE_X_
FUTURE_X_^2

0.000309
-0.000706
0.266192

2.24E-05
0.001244
0.029983

13.82070
-0.567801
8.878048

0.0000
0.5702
0.0000

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)

0.043001
0.041935
0.000879
0.001387
10108.03
40.34988
0.000000

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat

0.000383
0.000898
-11.23405
-11.22488
-11.23067
2.137618

Analysis :- Null Hypothesis : There is no Heteroscedasticity.

Rejected the null hypothesis as the probe value is less than 0.05.
Thus, there is heteroscedasticity.

Coorelogram Test : LEVEL(lnspot)

Date: 11/24/13 Time: 19:03
Sample: 1 1801
Included observations: 1799
Autocorrelation
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Partial Correlation
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1
2
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5
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10
11
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16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36

AC

PAC

-0.083
-0.010
0.026
-0.030
0.045
-0.047
-0.007
0.003
0.014
0.025
0.047
0.006
0.036
-0.043
-0.033
0.061
-0.011
0.000
-0.025
0.027
0.053
-0.015
0.037
0.015
-0.002
0.005
-0.049
0.012
0.036
-0.035
0.025
0.050
0.022
-0.017
-0.028
-0.039

-0.083
-0.017
0.024
-0.026
0.041
-0.042
-0.012
-0.003
0.018
0.024
0.055
0.013
0.039
-0.040
-0.038
0.052
0.005
-0.001
-0.024
0.023
0.046
-0.005
0.035
0.022
0.004
0.002
-0.045
0.003
0.033
-0.022
0.019
0.048
0.023
-0.025
-0.022
-0.050

Q-Stat
12.507
12.671
13.898
15.475
19.075
23.117
23.211
23.222
23.581
24.719
28.739
28.805
31.209
34.620
36.577
43.317
43.553
43.553
44.701
45.992
51.106
51.518
54.064
54.500
54.505
54.559
58.861
59.115
61.483
63.690
64.809
69.316
70.204
70.745
72.178
75.044

Prob
0.000
0.002
0.003
0.004
0.002
0.001
0.002
0.003
0.005
0.006
0.002
0.004
0.003
0.002
0.001
0.000
0.000
0.001
0.001
0.001
0.000
0.000
0.000
0.000
0.001
0.001
0.000
0.001
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000

Analysis : Null Hypothesis- There is no autocorrelation.

Rejected null hypothesis.
Prob value is less than 0.05, thus there is a problem of autocorrelation.

Correlogram:-first difference(lnspot)
Date: 11/24/13 Time: 19:13
Sample: 1 1801
Included observations: 1798
Autocorrelation
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Partial Correlation
****|
***|
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1
2
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5
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7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36

AC

PAC

-0.534
0.018
0.042
-0.060
0.077
-0.061
0.014
-0.001
0.000
-0.005
0.029
-0.033
0.051
-0.042
-0.038
0.077
-0.039
0.017
-0.036
0.012
0.044
-0.056
0.034
-0.002
-0.011
0.028
-0.053
0.017
0.044
-0.060
0.016
0.024
0.005
-0.013
0.000
-0.052

-0.534
-0.374
-0.236
-0.244
-0.128
-0.140
-0.131
-0.135
-0.125
-0.139
-0.086
-0.103
-0.020
-0.024
-0.109
-0.057
-0.048
-0.023
-0.068
-0.086
-0.032
-0.070
-0.054
-0.034
-0.031
0.015
-0.033
-0.061
-0.005
-0.045
-0.072
-0.045
0.004
0.000
0.026
-0.077

Q-Stat
513.70
514.26
517.46
523.94
534.55
541.26
541.61
541.61
541.61
541.66
543.20
545.17
549.85
553.00
555.67
566.34
569.06
569.58
571.87
572.12
575.57
581.20
583.35
583.36
583.59
585.04
590.12
590.63
594.14
600.74
601.20
602.28
602.33
602.65
602.65
607.69

Prob
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000

Analysis : Null Hypothesis- There is no autocorrelation.

Rejected null hypothesis.
Prob value is less than 0.05, thus there is a problem of autocorrelation.

Correlogram: second diff. (lnspot)

Date: 11/24/13 Time: 19:13
Sample: 1 1801
Included observations: 1797
Autocorrelation
*****|
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Partial Correlation
*****|
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19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36

AC

PAC

-0.678
0.171
0.042
-0.078
0.090
-0.069
0.028
-0.005
0.003
-0.013
0.031
-0.047
0.057
-0.030
-0.037
0.075
-0.056
0.035
-0.032
0.005
0.042
-0.060
0.041
-0.010
-0.016
0.040
-0.050
0.014
0.041
-0.058
0.022
0.008
0.000
-0.009
0.020
-0.056

-0.678
-0.536
-0.373
-0.367
-0.253
-0.200
-0.155
-0.135
-0.099
-0.122
-0.069
-0.102
-0.040
0.051
-0.011
-0.006
-0.011
0.038
0.034
-0.023
0.015
-0.007
-0.017
-0.007
-0.031
0.029
0.035
-0.023
0.021
0.025
-0.014
-0.041
-0.008
-0.006
0.080
0.017

Q-Stat
828.23
880.77
883.94
895.02
909.54
918.16
919.58
919.62
919.63
919.96
921.75
925.83
931.72
933.36
935.90
946.23
951.85
954.06
955.96
956.00
959.26
965.90
968.89
969.06
969.50
972.48
977.02
977.40
980.52
986.58
987.49
987.61
987.61
987.77
988.50
994.16

Prob
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000

Analysis : Null Hypothesis- There is no autocorrelation.

Rejected null hypothesis.
Prob value is less than 0.05, thus there is a problem of autocorrelation.

Level unitroot
Null Hypothesis: LNSPOT has a unit root
Exogenous: Constant
Lag Length: 1 (Automatic based on SIC, MAXLAG=24)

Augmented Dickey-Fuller test statistic

Test critical values:
1% level
5% level
10% level

t-Statistic

Prob.*

-1.359802
-3.433783
-2.862943
-2.567564

0.6033

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(LNSPOT)
Method: Least Squares
Date: 11/24/13 Time: 19:30
Sample (adjusted): 3 1801
Included observations: 1799 after adjustments
Variable

Coefficient

Std. Error

t-Statistic

Prob.

LNSPOT(-1)
D(LNSPOT(-1))
C

-0.002453
-0.081989
0.014473

0.001804
0.023522
0.010460

-1.359802
-3.485581
1.383731

0.1741
0.0005
0.1666

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)

0.007962
0.006857
0.019527
0.684843
4529.589
7.207360
0.000763

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat

0.000244
0.019595
-5.032339
-5.023176
-5.028956
2.002514

Analysis :- The prob. Value is 0.6033, so we will accept the null hypothesis ,i.e. ther is unit root
problem. Data is non stationary.

First difference unit root

Null Hypothesis: D(LNSPOT) has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic based on SIC, MAXLAG=24)

Augmented Dickey-Fuller test statistic

Test critical values:
1% level

t-Statistic

Prob.*

-46.08289
-3.433783

0.0001

5% level
10% level

-2.862943
-2.567564

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(LNSPOT,2)
Method: Least Squares
Date: 11/24/13 Time: 19:32
Sample (adjusted): 3 1801
Included observations: 1799 after adjustments
Variable

Coefficient

Std. Error

t-Statistic

Prob.

D(LNSPOT(-1))
C

-1.083311
0.000264

0.023508
0.000461

-46.08289
0.573425

0.0000
0.5664

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)

0.541656
0.541401
0.019532
0.685549
4528.663
2123.633
0.000000

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat

0.000000
0.028842
-5.032422
-5.026313
-5.030167
2.002758

Analysis :- The prob. Value is 0.00001, so we will reject the null hypothesis ,i.e. ther is not unit
root problem. Data is stationary.

Level unitroot
Null Hypothesis: LNFUTURE has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic based on SIC, MAXLAG=24)

Augmented Dickey-Fuller test statistic

Test critical values:
1% level
5% level
10% level

t-Statistic

Prob.*

-1.215859
-3.433781
-2.862942
-2.567563

0.6697

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(LNFUTURE)
Method: Least Squares
Date: 11/24/13 Time: 19:34
Sample (adjusted): 2 1801
Included observations: 1800 after adjustments
Variable

Coefficient

Std. Error

t-Statistic

Prob.

LNFUTURE(-1)
C

-0.001898
0.011251

0.001561
0.009061

-1.215859
1.241747

0.2242
0.2145

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid

0.000822
0.000266
0.016735
0.503570

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion

0.000245
0.016738
-5.341475
-5.335369

Log likelihood
F-statistic
Prob(F-statistic)

4809.327
1.478314
0.224198

Hannan-Quinn criter.
Durbin-Watson stat

-5.339221
2.014125

Analysis :- The prob. Value is 0.6697, so we will accept the null hypothesis ,i.e. ther is unit root
problem. Data is non stationary.

First difference unit root

Null Hypothesis: D(LNFUTURE) has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic based on SIC, MAXLAG=24)

Augmented Dickey-Fuller test statistic

Test critical values:
1% level
5% level
10% level

t-Statistic

Prob.*

-42.80512
-3.433783
-2.862943
-2.567564

0.0000

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(LNFUTURE,2)
Method: Least Squares
Date: 11/24/13 Time: 19:35
Sample (adjusted): 3 1801
Included observations: 1799 after adjustments
Variable

Coefficient

Std. Error

t-Statistic

Prob.

D(LNFUTURE(-1))
C

-1.009028
0.000263

0.023573
0.000395

-42.80512
0.666092

0.0000
0.5054

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)

0.504860
0.504585
0.016733
0.503152
4806.903
1832.278
0.000000

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat

2.10E-05
0.023773
-5.341749
-5.335640
-5.339494
2.000640

Analysis :- The prob. Value is 0.0000, so we will reject the null hypothesis ,i.e. there is not unit
root problem. Data is stationary.

AR(1)
Dependent Variable: D_LNSPOT
Method: Least Squares
Date: 11/24/13 Time: 19:39
Sample (adjusted): 3 1801
Included observations: 1799 after adjustments
Convergence achieved after 3 iterations
Variable

Coefficient

Std. Error

t-Statistic

Prob.

C
AR(1)

0.000244
-0.083311

0.000425
0.023508

0.573470
-3.543970

0.5664
0.0004

R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
Inverted AR Roots

0.006941
0.006388
0.019532
0.685549
4528.663
12.55973
0.000404
-.08

Mean dependent var

S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat

0.000244
0.019595
-5.032422
-5.026313
-5.030167
2.002758

Date: 11/24/13 Time: 19:41

Sample: 3 1801
Included observations: 1799
Q-statistic
probabilities adjusted
for 1 ARMA term(s)
Autocorrelation
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Partial Correlation
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1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36

AC

PAC

-0.001
-0.014
0.023
-0.024
0.039
-0.045
-0.011
0.003
0.017
0.031
0.050
0.013
0.034
-0.044
-0.032
0.058
-0.006
-0.003
-0.023
0.029
0.055
-0.008
0.038
0.019
0.000
0.001
-0.048
0.011
0.035
-0.030
0.026
0.054
0.025
-0.018
-0.033
-0.037

-0.001
-0.014
0.023
-0.024
0.040
-0.046
-0.009
-0.001
0.020
0.027
0.054
0.012
0.034
-0.046
-0.030
0.055
0.001
-0.003
-0.022
0.029
0.043
-0.006
0.037
0.019
0.003
-0.002
-0.044
0.010
0.030
-0.023
0.024
0.048
0.017
-0.028
-0.024
-0.043

Q-Stat
0.0034
0.3804
1.3484
2.3915
5.1135
8.7427
8.9640
8.9818
9.4797
11.170
15.767
16.080
18.150
21.609
23.448
29.570
29.645
29.661
30.643
32.210
37.660
37.767
40.390
41.025
41.025
41.028
45.194
45.411
47.596
49.256
50.524
55.909
57.058
57.646
59.656
62.191

Prob

0.537
0.510
0.495
0.276
0.120
0.176
0.254
0.303
0.264
0.106
0.138
0.111
0.062
0.053
0.014
0.020
0.029
0.032
0.030
0.010
0.014
0.010
0.012
0.017
0.023
0.011
0.015
0.012
0.011
0.011
0.004
0.004
0.005
0.004
0.003