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Eviews: Class 2

Welcome Note

In this problem set you will find some questions on data transofrmation and
bivariate linear regaression. Maybe you would like to practice with the
lecture example before starting. Hope you will enjoy the class.
Best wishes, Luigi

Problems

1. Data Transformations
1.1. Access the Eviews files named uk_imports.wf1
Refer to page 18 of the lecture notes in calculating data in real terms:
o Compare the real with the nominal series.
o Do a line graph of nominal and real GDP. Which one has a smaller trend?
o Do a scatter diagram and find the correlation coefficient between real GDP and
real Imports, and Real Imports and Real Import Prices. Compare this with the
nominal series’ pair wise correlations.
o Comment on the results.

1.2 Access the Eviews files named uk_imports.wf1


Refer to page 19 and 20 of the lecture notes in calculating the growth rate of GDP:

o Compare the two ways of calculating the annual growth rate of GDP.
o Graph both the first difference and the growth rate of GDP.
o Comment on the patterns.

1.3 Use the Excel file named FinancialData.xlsx


1. Describe the data (type of data, frequency, number of observations, variables)
2. Create a Workfile and Import the data into Eviews
3. Provide graphs and Descriptive Statistics for each variable and comment on
the results. Is normality a plausible assumption for each variable?
4. With the use of logarithms, transform the stock price indexes into percentage
changes. Compare the level and growth rate series. Do growth rates of stock
price indexes seem normally distributed?

2. Simple Bivariate Regression

1
We will start with a simple Bivariate Regression using the hypothetical cross- sectional
data for the income and consumption expenditure of 25 Households. (EViews Workfile
cs1.wf1 saved from last week).

2.1 Economic Theory and the Data Generating Model


The Keynesian theory of consumption is the basis of this model (1936). The theory states
that real consumption expenditure depends on real disposable income, other things held
constant. When income rises, consumption expenditure rises but changes in consumption
expenditure are less than the changes in income that cause them. Also, as income rises, the
average propensity to consume falls. The Keynesian consumption function is usually
presented as a liner relationship as the following econometric model:
Yi   X i ui
where Yi is real consumption expenditure (cons), Xi is real disposable income (inc), ui is the
error term and α (constant) ,β, are the unknown parameters.
The first two terms show the deterministic part of the relationship, and the last term (error
term) is the stochastic part, the unobservable disturbance. The responsiveness of
consumption to income changes (β) is known as the Marginal Propensity to Consume
(MPC) and should be a number between 0 and 1. The constant of this equation has an
economic meaning as well; it measures autonomous consumption.

2.2 Estimation in EViews

Click on Quick, Estimate Equation and in the box that appears write:
cons c inc
Or
cons=c(1)+c(2)*inc

Alternatively, you can use the command log:


ls cons c inc
Look at the regression output and comment:
 Sign, Size & Significance of the coefficients
 Interpretation of the intercept and the slope coefficients
 Overall significance of the model
 Fit of the model: R-squared and Adjusted R-squared
 Graphs: Click on View/ Actual, Fitted, Residual/ Actual, Fitted, Residual
graph. Comment. Is this a good fit?

3. Simple Bivariate Regression

3.1 Economic Theory and the Data Generating Model


We test empirically the CAPM return-beta relationship:

2
We test it empirically using the Single Index Mode.
So Let M = the market index (for example, S&P 500)
𝑅𝑚 = 𝑟𝑚 − 𝑟𝑓 = excess return of the market portfolio (the index)
𝑅𝑖 = 𝑟𝑖 − 𝑟𝑓 = excess return of a security
Using historical data we can regress the excess return of a security (𝑅𝑖 = 𝑟𝑀 − 𝑟𝑓 ) on the
excess return of the index:
Ri t    i   i RM t   ei t 
𝛼𝑖 is the stock expected excess return when the market excess return is zero.
𝛽𝑖 is the security sensitivity to the index.
𝑒𝑖 is the zero-mean firm specific surprise.

With this model we can decompose risk as:


Total risk= Systematic risk + Firm-specific risk
 i2   i2 M2   2 (ei )

3.2 Estimation in EViews


Use the file American Express Beta.xls for the data, and run the regression of the
model.
 Create the workfile and have a look at the variables.
 Look at the regression output and comment:
 Sign, Size & Significance of the coefficients
 Interpretation of the intercept and the slope coefficients
 Overall significance of the model
 Fit of the model: R-squared and Adjusted R-squared
 Graphs: Click on View/ Actual, Fitted, Residual/ Actual, Fitted, Residual
graph. Comment. Is this a good fit?