The Role of Sentiment Indicators as Determinants of Daily Return

for the US Dollar/Japanese Yen Exchange Rate

By
Ryan Brauchler
University of Colorado at Boulder

Abstract: This paper addresses the influence of sentiment and market volatility data on the daily returns
of the US Dollar/Japanese Yen exchange rate. A stationary autoregressive model of order one is
constructed that contains market index data, sentiment indicators, macroeconomic statistics for the US
and Japan, and commodities prices. The data demonstrate that sentiment and market volatility (SMV)
indicators improve the model for daily returns and most are statistically significant. The paper concludes
with a discussion of the implications of the results and suggestions for later research.

Keywords: Foreign exchange, macroeconomic factors, returns, sentiment, volatility

JEL Classification Codes:

C01 (Econometrics)
C32 (Time series models)
F31 (Foreign exchange)
E52 (Monetary policy)
G15 (International financial markets)

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Author Information: Ryan Brauchler is a junior at the University of Colorado at Boulder studying
Economics, Math, and Quantitative Finance. This paper was originally produced as a final project in a
course in Applied Econometrics under Professor Carlos Martins-Filho. He would like to thank Carlos for
his invaluable contributions to this paper and research contained therein. Comments and questions are
welcome at ryan.brauchler@colorado.edu.

Introduction

With an estimated daily trading volume of $3.21 trillion USD, the foreign exchange (FX) market is by far
the largest and most liquid in the world.12 Its worldwide presence, lack of central markets, and 24 hour
trading days make the FX market one of the most prevalent drivers of global economic trends. Modeling
the FX market therefore has important implications for the development of public policy, superior
financial management, and globalization strategies. The US Dollar (USD) and Japanese Yen (JPY)
currency pair is particularly important because the United States and Japan are ranked number 1 and 2,
respectively, in GDP size (The World Bank, 2009). New York is ranked as the second most important
global financial center and Tokyo is ranked ninth (Scott, 2008). The sheer size of both these economies
warrants specific attention to their currency dynamics, as they have pervasive global effects.
The traditional approaches taken to empirically model exchange rate dynamics include using
macroeconomic factors, central bank interventions, and heterogeneous expectations. To date however,
little research has considered the possible significance of consumer and market sentiment indicators on
exchange rate returns or volatility (Menkhoff & Rebitzky, 2008). This paper seeks to include sentiment
metrics to propose a modified exchange model specific to the US Dollar (USD) and Japanese Yen (JPY).
Using a stationary autoregressive model of order one (SAR(1)), we show that sentiment
indicators are, in fact, significant factors to consider in exchange rate modeling. As jointly significant
variables, we find that sentiment and market volatility (SMV) variables increase the R2 of daily USD/JPY
returns. When coupling joint and individual significance, it becomes apparent that SMV
indicators have a significant impact on the model for USD/JPY returns. To conclude, implications
of this finding and suggestions for future research are offered.

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Literature Review

Modeling the foreign exchange market has been the subject of a great volume of empirical work,
especially in recent decades. The traditional view taken by empiricists has been that macroeconomic
variables are the driving force of exchange rate dynamics over the short to medium term, though this view
has enjoyed little empirical support (Mark, 2009; Meese & Rogoff, 1983; Rapach & Wohar, 2002). Mark
(2009) suggests that it might be sensible to shift attention away from macroeconomic variables in
modeling exchange rates toward variables such as the “difference in differences of log national price
levels.” Morana (2009) found “evidence of significant long-term linkages and trade-offs between
macroeconomic and exchange rate volatility, particularly involving output and inflation volatility, and
money growth volatility to a lesser extent.” He contends that macroeconomic variables tend toward
fundamentals over longer time horizons, not the short to medium term.
Foreign exchange rates consistently demonstrate clustered volatility with long memory (Wang &
Yang, 2008; Morana, 2009). Following a day of high volatility, exchange rates will be more likely to
demonstrate higher than average volatility. This characteristic is asymmetric, however, as currency
depreciation leads to greater volatility than currency appreciation (Wang & Yang, 2008). This asymmetry
may be due to some currencies having greater economic importance than others. Higher volatility in the
USD, for example, should have less of an effect on future volatility than high volatility in the AUD
simply because less currency risk is assumed with currencies of greater economic importance.
It is a widely noted that interventions by central banks into currencies increase volatility (Galati et
al., 2005; Frenkel et al., 2005; Beine et al., 2007). This implies that the level of local currency reserves
held by a country may have a significant impact on the volatility of that currency (Wang & Yang, 2008).
Beine, Janssen, and Lecourt (2009) found that the effects of interventions can be stemmed with strategic
use of communications to outline the purpose and policy of each intervention. Note that the Bank of Japan
has historically been one of the most active and unilateral governments with respect to currency
interventions (Beine et al., 2009; Ito & Yabu, 2007). For example, in Figure 4 there is a spike in volatility
in 1998 that is due to a $20 billion USD purchase by the Japanese government in April, 1998 (Beine et
al., 2009). The Bank of Japan appears to have adapted to mediate effects on volatility of interventions,
because in the time from 1998 to 2004, interventions essentially lessened volatility (Hillebrand, Schnabl,
& Ulu, 2009). Examples like this happen relatively frequently in the data, showing that government
purchases and sales of currency can both increase and decrease the volatility of the purchased or sold
currency depending on the circumstances of executing the intervention (Beine, Janssen, & Lecourt, 2009).
Edwards and Rigobon (2009), found that tight capital controls depreciate the local exchange rate and
increase its volatility, while also decreasing its sensitivity to external economic shocks.
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 There is abundant evidence that actors in the FX markets have heterogeneous expectations about
exchange rates (Frankel and Froot, 1987; Ito, 1990; MacDonald and Marsh, 1996; Elliott & Ito, 1999).
Heterogeneous expectations are the reason for misalignment of exchange rates with equilibrium levels.
This misalignment is exacerbated by the presence of unsophisticated and noise traders in the market
(Menkhoff & Rebitzky, 2009). In times of great disparity between the equilibrium and current exchange
rates, however, there is decreased risk and increased potential profit because there is a higher probability
that the exchange rate will turn back toward its equilibrium level than continue deviating. Menkhoff and
Rebitzky (2009) contend that heterogeneity increases in times on higher news frequency: recessions,
disasters, elections, because differences in the information used by market participants increase.
Research on the impact of sentiment indicators on exchange rate returns and volatility is thus far
infrequent. Over time horizons greater than two years, exchange rates move toward fundamentals and that
investor sentiment is connected to this convergence (Menkhoff & Rebitzky, 2008). MacDonald (2000)
found that the expectations and sentiments of investment professionals on the exchange rate consistently
display irrationality and significant deviation from both fundamentals and the eventual exchange rate.
Menkhoff and Rebitzky (2008) find that “investor sentiment in exchange rates reflects three characteristic
features: longer-term orientation, alignment with fundamentals, and non-linear dependence on exchange
rate's deviation from PPP.” Research on sentiment’s role in exchange rate modeling should therefore
focus on a longer time horizon to capture the asymptotic convergence of exchange rates to fundamentals.

Data

All data used in this paper were acquired using the Bloomberg Professional Service via a Bloomberg
terminal. A detailed description of data acquisition and preparation procedures is outlined in Appendix A.
The date range of the data is from January 3, 1990 to November 20, 2009, which gives a total of 7,262
observations. There are 165 raw variables contained in the data set. Taking log and squared terms, there
are a total of 369 metrics contained in the data. When possible, real, seasonally adjusted data were used,
all chained to the year 2005. The data have a combination of daily, monthly, quarterly, and annual
frequencies. When frequency was less than daily, entries between updates were filled with the previous
value for the variable. When a variable did not have the full 7,262 observations, the regressions were run
over only the date range for which all regressors had complete data. Definitions of each of the regressors
used in this analysis are contained in Appendix B along with descriptive statistics on each variable.
The variables contained within the data set were divided into five categories.

Currency rate – The daily rate, returns, and intra-daily volatility of the exchange rate.
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US and Japanese stock indices – Values directly tied with equity indices in the US and Japan,
including prices, daily returns, volatilities, and trade volumes.

Commodities – Daily prices of selected commodities on major exchanges.

US and Japanese macroeconomic statistics – Governmental economic statistics released in
the US and Japan.

Sentiment/Psychology/Volatility - Measures of consumer and market sentiment and market
volatility in both Japan and the US.

Econometric Model

Let the return of USD/JPY be calculated as follows:

(1)

Where is the exchange rate at time t and is the exchange rate at time t-1. For this paper,
is measured as a proportion, not a percentage.
The SAR(1)s used in this paper are defined as follows:
(2)
Where is one-period lagged daily return of USD/JPY. Each term represents a
coefficient and regressor used in a traditional OLS. Each regression residual, , is independent and
identically distributed with mean zero and variance .
Statistical Assumptions
These data are examined for their adherence to the Gauss-Markov assumptions with the following
results, as summarized in Appendix C. The data are linear in parameters by the definition and design of
the model. There is no regressor that is perfectly collinear with any other regressor or linear combination
of the other regressors. The expected value of the error term, ut, given X is zero and the OLS estimators
are assumed to be unbiased conditional on X. Homoskedasticity does not hold because White’s test for
heteroskedasticity showed very significant (Prob>chi2=0.0000) results in all cases, so we reject the null
that the data are homoskedastic and conduct robust regressions. We assume that there is no serial
correlation for ut in all cases. The assumption of random sampling, or independent identical distribution,
does not hold either, because each observation of the time series is not independent from the observation
that preceded it. For purposes of this paper, normality is not assumed. Distribution-robust methods were
used throughout under the assumption of asymptotic normality to account for non-normal data.

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Models

This paper uses two regression models. Regression 1 uses selected major statistics, excluding SMV
indicators on daily return. Regression 2 uses selected major statistics including SMV indicators on daily
return. Below are the results of each regression with coefficients, n, and R2 reported. See Appendix B for
descriptive statistics about the variables used. Also see Appendix E for the raw regression results of
regressions 1 and 2.

Regression 1 – Selected major statistics excluding sentiment indicators on daily return

With n=1,161 and R2=0.0843.

Regression 2 – Selected major statistics including sentiment indicators on daily return

With n = 1,161 and R2 = 0.1371.

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Notes on the functional forms of regressions 1 and 2

The regressors in this model were chosen for their overall breadth in covering both the economies of
Japan and the US and their generality as indicators of economic health, growth, and activity. Rudimentary
data mining was utilized to arrive at the final functional form. Terms were compared with their logs and
one-period lags for improvements in significance. The permutation of greatest significance was chosen
for the model. The coefficients on each should be interpreted according to their respective forms.

Interpretation and Implications

With the addition of sentiment and market volatility (SMV) variables to the model, we find that R2
increases from 0.0843 to 0.1371. Though the R2 values are small and explain only a small portion of the
variation of USD/JPY returns, a test for joint significance of the SMV variables in R2a reveals a
χ2(9,52.2) of 4.143E-8, indicating that the SMV variables are jointly very significant. Individually, at the
5% level, concconfy, ljcomacfy, jntlalliy-1, pcrttotlt, and L.vixt-1 are statistically significant. At the 10%
level, conssentt-1 is statistically significant (Appendix E). Since six of the nine SMV indicators added to
the regression are both jointly and individually statistically significant, it can be concluded that SMV
variables are useful and significant in regressions of USD/JPY exchange rate returns and substantially
improve the goodness-of-fit of the return model.
The coefficients of ljgdpgdpt, jhhsppcat, and m2t change from positive to negative with the
addition of the SMV regressors. Additionally, the coefficients of jmnsm2t, lvelom2t, and ustbtott change
from negative to positive with the addition of the SMV regressors. In regression 1a, none of these six
regressors is statistically significant. In regression 2, the coefficient on m2t becomes statistically
significant at the 5% level. Since the other regressors are insignificant a change in their sign is
inconsequential to this model. The coefficient on m2t is extremely small in regression 1 (8.14e-07) and
becomes two orders of magnitude larger in regression 2 (0.0000161). Though this is still a very small
coefficient and is insignificant from a practical standpoint, the change in the size of the coefficient is
significant and indicates that inclusion of SMV indicators brings out statistical significance in m2t and
produces a different relationship between m2t and returns. We would expect, however, that m2t would
have the opposite effect on USD/JPY exchange rates because increasing the money supplies contributes
to increased inflation, which correlated with currency depreciation.
In regression 1 we find that usdjpyrt-1, lnkyt, lspxt, clat, lgoldst-1, jntbalat, jgdttott, jcpngent-1,
usgg5yrt, lgdpchwgt, doutfedt-1, fdfdt, jnfrtotlt, and jnfrrsrvt are significant at the 10% level. The coefficient
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on usdjpyrt-1 is as expected. One-period lagged returns would be expected to have a negative relationship
with current returns because the farther a currency deviates from its equilibrium the more likely it is to
revert back to that equilibrium quickly (Kilian & Taylor, 2003). Both lnkyt and lspxt have the expected
signs because an increase in either index is a sign of economic growth, which tends to appreciate the local
currency unless inflation is high. The coefficient on lgoldst-1 is different than expected. Because investors
tend to flee to gold from a weakening dollar we would expect the coefficient to be negative. The
coefficient on jgdttott-1 is as expected because increasing exports relative to imports is a sign of economic
growth, which tends to strengthen the local currency relative to the currency of the importing country. It
is possible that high inflation or loosening capital controls in Japan are the causes for the positive
coefficient. The coefficient on jcpngent-1 is different than expected because under the theory of
purchasing power parity, we would expect to see the currency of a country with high inflation to
depreciate. With that said, it is possible that the coefficient on lgdpchwgt is the same as expected because
though economic growth can benefit a currency, the effects of high inflation due to economic growth can
outweigh the potential appreciatory effects of growth. The coefficient on doutfedt-1 is as expected because
a country with high amounts of debt would be expected to have a weaker currency. The coefficient on
jnfrtotlt is as expected because if Japan holds more assets in reserve, we would expect its economic
solvency to increase and therefore its currency to appreciate. If Japan holds more of its own currency
(jnfrrsrvt), we would expect appreciation because of a decrease in circulating money supply, so the
coefficient on jnfrrsrvt is different than expected. Given their extremely small coefficients, jntbalat and
doutfedt-1 are not practically significant despite their statistical significance.
In regression 2, all of the above variables remained significant at the 10% level except for jntbalat
and fdfdt. This is due to the inclusion of the sentiment variables in the model. The coefficients on
conssentt-1, concconft, ljcomacft, jntlallit-1, pcrttotlt, and vixt-1 are significant at the 10% level. The
coefficients on conssentt and concconft are opposite of expected. We would expect that as consumer
sentiment and confidence goes up, the relative value of the USD to the JPY would appreciate. This could
possibly also be due to the fact that consumer confidence rises with economic growth, and as is
previously discussed, the positive effects of growth can be outweighed by other mitigating price factors
such as government actions, inflation, etc. The coefficient on lcomacft is as expected because as Japanese
consumer confidence rises, the Yen appreciates relative the US dollar. The coefficient on jntlallit-1 is
opposite of expected. We would expect that as business conditions in Japan improve, it would drive
commerce and stimulate the Yen. Possible explanations for this are the same as those for US economic
growth. The coefficient on pcrttotlt is opposite of expected because a higher put/call ratio indicates a
bearish outlook on the economy. We would expect a bearish economic outlook to depreciate the value of

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the dollar. The coefficient on vixt-1 aligns with our expectations because we would expect to see the dollar
depreciate with higher volatility and therefore greater uncertainty in the US market.
In addition to the possible explanations for the above anomalies, it is possible that the functional
form model was specified incorrectly, thus leading to incorrect signs on certain coefficients. More
research is required to determine if this is in fact the case. The effects of globalization may also have an
effect, such that US and Japanese macroeconomic factors may be more correlated, both directly and
indirectly, than has been traditionally assumed.

Conclusion and Suggestions for Future Research

Modeling the dynamics of a major currency pair proves to be a difficult undertaking with traditional OLS
estimation. Unfortunately, the predictive ability of the model is too little to be of practical use. There exist
several significant variables for which this model does not account that would have increased its
statistical validity. Too many of the regressors display unexpected coefficients, so more research is
needed to examine the validity of the functional form. The above presented model also falls short of
current research because it is linear and better models exist and have been developed.
Future research should focus on using non-linear models such as ARCH, GARCH, and others to
produce the regressions, bring in data on other countries that are closely tied to the US and Japan, use
higher data frequency over a longer period of time, and incorporate an event driven analysis that accounts
for central bank interventions. Despite its shortcomings, this paper has shown that sentiment indicators do
in fact exert a significant effect on the daily returns of the USD/JPY currency pair. This finding can be
used to bolster future models and may help to better model and forecast future exchange rates.

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Figure 1 – Daily Exchange Rates

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Figure 2 – Daily Returns

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Figure 3 – Daily Returns Histogram with Overlaid Normal Curve

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Figure 4 – Intra-daily Exchange Rate Volatility

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Appendix A – Sources of Data and Data Set Construction

All the data used in this paper were procured from data available on a Bloomberg Professional Terminal.
Included in Appendix B is a table of the variables and the tickers used to find the data via Bloomberg.
Using the Bloomberg Excel Add-In, the data were imported into an Excel Spreadsheet for
intermediate manipulation before importation into Stata. This was accomplished using the Data Import
Wizard available on the Add-In, utilizing primarily the BDH function. A good summary of the
Bloomberg functions can be found here:
mclennan.mbs.edu/classroom/guides/bloomberg/BBexcel.pdf.
In Excel, the data were transformed include log and squared terms. Once this was done, the data
were imported into Stata using the code provided by Professor Carlos Martins-Filho of the University of
Colorado at Boulder. He can be reached at the following e-mail address:
carlos.martins@colorado.edu.
Once in Stata, a “Date” variable was added to declare define the data as a time series.
Additionally, in each regression, the command L. was used to create lagged regressands and regressors.

Appendix B – Table of Variables and Descriptive Statistics

Below are two tables containing all the variables within the data set used for the calculations and models
in this paper and descriptive statistics about each. (Note: The font size for this table had to lessened in
order to preserve formatting of the table.)

Regressor Description Units

lnky Nikkei 225 Index Log of Points
lspx S&P 500 Index Log of Points
cla Oil Prices USD
lgolds Gold Prices Log of USD
jntbala Japan Trade Balance Yen (Billions)
ljgdpgdp Japan Real SA GDP Log of Yen (Trillions)
jgdttot Total Japanese Government Debt Yen (Trillions)
jnue Japanese Unemployment Percentage
Value (Propensity to
jhhsppca Propensity to Consume
consume)

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bojdtr Bank of Japan Target Rate Yield (Yen)
jmnsm2 Japanese M2 Money Supply Yen (Trillion)
jcpngen Japanese CPI Value
usgg5yr 5 year US Treasury Yield Yield
lgdpchwg Total Real US GDP Log of USD (Billions)
usurtot US Unemployment Percent
doutfed Federal Debt Outstanding USD (Billions)
jnfrtotl Official Reserves - Assets Yen (Billions)
m2 M2 Money Supply USD (Billions)
Log of number of currency
lvelom2 Velocity of M2 Money Supply
exchanges per year
cpiindx US CPI Value
ustbtot US Trade Balance USD (Billions)
ustbjpn US Trade Balance with Japan USD(Billions)
fdfd US Fed Funds Rate Percent
jnfrrsrv Japanese Currency Reserves USD (Billions)
conssent US Consumer Sentiment Points
consexp US Consumer Expectations Points
concconf US Consumer Confidence Points
jtscsall Tankan Sales All Industries All Enterprises Points
jtemeaal Tankan Employment Outlook - All Industries Points
ljcomacf Overall Japanese Consumer Confidence Log of Points
jntlalli Tankan Business Conditions All Industries Large Points
pcrttotl Put/Call Ratio Ratio of Proportions
vix CBOE VIX Index Points

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 stats | usdjpyr usdjpysd lnky lspx cla lgolds jnfrtotl
---------+----------------------------------------------------------------------
N | 5188 5188 7262 7262 2557 7262 7262
mean | -.0000711 .5491622 9.652214 6.718898 58.57461 6.000176 425.8962
p50 | 0 .4702792 9.708605 6.894234 61.1 5.929589 272.758
min | -.0671384 0 8.861489 5.688533 21.91 5.531609 66.888
max | .0565855 5.318586 10.56916 7.355737 145.45 7.043596 1056.769
variance | .0000493 .1160544 .1036149 .2350596 698.2519 .12432 114505.9
sd | .0070238 .3406675 .3218926 .4848295 26.42446 .3525904 338.3872
skewness | -.3664114 3.176227 -.1156483 -.5633662 .6492353 1.191843 .595087
kurtosis | 8.188957 26.20806 2.693345 1.840743 3.45574 3.536042 1.765659
--------------------------------------------------------------------------------
stats | jntbala ljgdpgdp jgdttot jnue jhhsppca bojdtr jmnsm2
---------+----------------------------------------------------------------------
N | 6138 7262 4892 7262 3582 7262 2397
mean | 785.6192 13.12334 629.0038 3.830226 73.35821 1.17259 712.0743
p50 | 840.6 13.12319 643.194 4 73.4 .5 708.6
min | -339.176 12.98087 334.131 2 69.2 0 675.6
max | 1575.047 13.25188 864.523 5.7 77.4 6 758.1
variance | 115786.4 .0041978 32597.36 1.157322 2.831001 2.967278 540.3626
sd | 340.274 .0647904 180.5474 1.075789 1.682558 1.722579 23.2457
skewness | -.9479509 .1157856 -.1935717 -.2547819 -.0253371 1.741564 .3097649
kurtosis | 4.220052 2.323012 1.577742 1.869555 2.747416 4.711614 2.190671
--------------------------------------------------------------------------------
stats | jcpngen usgg5yr lgdpchwg usurtot doutfed m2 lvelom2
---------+----------------------------------------------------------------------
N | 7262 7262 7262 7262 7262 7262 7262
mean | 100.4337 5.117474 9.258573 5.609171 3873.66 5048.817 .6540294
p50 | 100.6 5.0928 9.289143 5.5 3681 4625.05 .644377
min | 92.1 1.2583 8.98026 3.8 2251.2 3168.9 .5262067
max | 104.1 9.066 9.504151 10.2 7195.2 8393.9 .7485346
variance | 4.477182 2.685702 .0304938 1.419511 964230.9 2511689 .0033957
sd | 2.115935 1.638811 .1746247 1.191432 981.9526 1584.831 .0582726
skewness | -1.528928 .0295727 -.1884678 1.136067 1.20159 .5348277 -.0371144
kurtosis | 6.419433 2.400367 1.620296 4.6528 4.978055 1.970822 2.022069
--------------------------------------------------------------------------------
stats | cpiindx ustbtot ustbjpn fdfd jnfrrsrv conssent consexp
---------+----------------------------------------------------------------------
N | 7262 6504 7262 7262 7262 7262 7262
mean | 171.1583 -29.9214 -5.410212 4.039552 411.2417 88.76018 81.20945
p50 | 168.4 -29.589 -5.421 4.625 261.985 90.6 82.2
min | 126.3 -67.764 -8.519 .02 59.966 55.3 49.2
max | 218.675 -.831 -1.914 10 1005.235 112 108.6
variance | 645.8772 438.133 1.846011 4.158104 110005.1 158.5263 177.8625
sd | 25.41412 20.93163 1.35868 2.039143 331.6702 12.59072 13.33651
skewness | .1862819 -.3039618 .0999345 -.2122575 .594277 -.5207072 -.214911
kurtosis | 1.947668 1.673352 2.326911 2.278444 1.753913 2.931489 2.575256
--------------------------------------------------------------------------------
stats | concconf jtscsall jtemeaal ljcomacf jntlalli pcrttotl vix
---------+----------------------------------------------------------------------
N | 7262 3888 7262 2031 7262 5435 7262
mean | 95.77808 .7510545 1.386533 3.737719 -3.17268 .7851941 20.21006
p50 | 99.2 1.4 7 3.819908 -6 .77 18.63
min | 25.3 -10.5 -46 3.284664 -47 .29 9.31
max | 144.7 3.6 24 3.916015 48 1.69 80.86
variance | 719.3661 7.433747 331.6122 .0321703 607.3515 .0398699 70.08657
sd | 26.821 2.72649 18.21022 .1793607 24.6445 .1996744 8.371772
skewness | -.2483899 -2.419702 -1.181607 -1.120493 .2144126 .5457751 2.067215
kurtosis | 2.444525 9.578772 3.564007 2.984791 2.26776 3.325257 10.44947
--------------------------------------------------------------------------------
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Appendix C – Table of Statistical Assumptions

Below is a listing of the several assumptions associated with multiple linear regressions and whether or
not they hold for the purposes of this paper.

Assumption Upheld or Reasoning

Rejected
Linearity in parameters Upheld The linear regressions produced in this paper are all linear in
parameters by the definition and design of the model.
No perfect collinearity Upheld None of the independent variables is a constant or a perfect
linear combination of the other independent variables.
Zero conditional mean Upheld The expected value of the error term given the explanatory
variables for all time periods, X, is 0.

Unbiasedness of OLS
Homoskedasticity
No Serial Correlation
Normality
Upheld The OLS estimators produced in this paper are unbiased
conditional on X and unconditionally as well:
, where j = 0,1,…,k.
Rejected Per the results of White’s test for Homoskedasticity, we find
significant evidence to reject the null of Homoskedasticity in
all cases.
Rejected The results of the Durbin Alternative Tests for
Autocorrelation indicate that there is strong evidence for
serial correlation.
Rejected For purposes of this model, normality is not assumed.
Methods accommodating other than normal distributions are
used throughout the paper to create more robust conclusions.
Normality does hold asymptotically.

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