F532HW510 - stock returns. Use the sample periods 1831:01...

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UNIVERSITY OF ROCHESTER William E. Simon Graduate School of Business Administration FIN 532 Professor G. William Schwert Advanced Topics in Capital Markets Spring 2010 Home work Assignment #5 Due: June 2, 2010 Use the Excel spreadsheet F532hw510.xlsx. There are four variables in these files: Stock, are returns to a value-weighted index of NYSE-listed stocks; Int, are returns to short-term riskless bonds; INFL is the inflation rate (using the PPI from 1857-1912 and the CPI from 1913-2009); and BC, is an indicator/dummy variable representing NBER recessions. (a) In Milton Friedman's Nobel lecture he proposed an important mechanism by which monetary policy could have real effects: Inflation uncertainty could be higher when inflation is higher. Test this hypothesis using the time series data on U.S. CPI inflation rates and short-term interest rates from 1913-2009. (b) Estimate a couple of alternative models for the conditional heteroskedasticity of monthly
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Unformatted text preview: stock returns. Use the sample periods 1831:01 through 2010:02, 1926:01 through 2010:02, and 1953:01 through 2010:02. (c) Also, model the conditional heteroskedasticity of the risk premium (difference between stock returns and the short-term interest rate) from 1926:01 through 2010:02. Are the results different from looking at raw stock returns? Why or why not? (d) Explain the different models and/or methods you use to represent conditional heteroskedasticity and how you interpret the results of your analysis. For example, which method works “best,” and what do you learn about the behavior of the data from this analysis? Is volatility unusually high now? You should write a short, concise report that includes a minimum of computer output. Show only what is necessary. You may use any computer program that you know how to use....
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This note was uploaded on 03/04/2010 for the course FIN 532 taught by Professor Schwert during the Spring '10 term at Rochester.

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