Compute the monthly risk-free rate from the US 3-month T-bill rate. Plot the rate on a graph

INSTRUCTIONS TO CANDIDATES

ANSWER ALL QUESTIONS

What am I required to do in this assignment?

Requirements:

You must use Eviews to complete this assignment. You will submit both the Eviews file and the report. The report needs to be typed and presentable. The report must address each of the tasks below. Do not restate the questions in your report. Your report has to be understandable as a stand-alone piece of work without referring to the Eviews file. You can include the graphs/ tables/ estimation results from Eviews to address the questions, but do not details the process of how you create them. The process will be visible in the Eviews file.

In the Eview files, you need to save all the variables created, all the graphs, estimation outputs and hypothesis test results, with their names clearly identify the questions they address.

Tables, graphs, figures, estimation outputs, etc. need to be clearly labelled.

Tasks:

Download the Excel file Data for assignment.xlsx. Sheet 1 contains historical prices of the S&P500 index, and the monthly US 3-month T-bill rate obtained from the Federal Reserve Bank of St. Louis. The data is in monthly frequency. Sheet 2 contains the historical prices of different equity indices. You will be assigned a specific index to work with. Sheet 3 contains the monthly historical prices of 10 US firms listed on Nasdaq. Out of these firm, each of you will be assigned a different subset of 6 firms to work with.

1.Compute monthly simple return of S&P500 and of the index assigned to you. Plot the price and simple return of the two indices on two different graphs. Each graph represents one market, consists of the price and return of that market index. Using information from the graph, discuss briefly the main features of these time series and compare between two markets.

2.Compute the monthly risk-free rate from the US 3-month T-bill rate. Plot the rate on a graph. (10 marks)

3.Report the descriptive statistics for the simple return of S&P500 and your assigned indices, and the monthly risk-free rate computed from task 2. Discuss the difference between these three variables based on their descriptive statistics.

(15 marks)

4.Conduct the ADF test for the price and return on your assigned index, and on the return on S&P500. Report and discuss the results.

5.Run the following regression:

 

a)Report the coefficients and their normal t-statistics and Newey-West t-statistics.

b)Conduct the White test for heteroskedasticity. Report and explain the results. 

c)Reflect on the results obtained from a) and b), what can you conclude about the predicting power of the US stock market performance for the return of your assigned market index? Propose the reasons why the US stock market does or does not have high predicting power on your assigned index.

6. Estimate the CAPM for the subset of 6 firms that is assigned to you in sheet 2:

ri,t = i + i * rm,t + ui,t

Where ri,t is the excess return on firm i , and rm,t is the excess market return.

a)Report all the alphas and betas and their corresponding t-statistics. Highlight the significant alphas and betas.

(20 marks)

b)Plot the betas against the average excess returns with the excess returns on the y axis.

(5 marks)

c)Test the hypothesis that the alphas are jointly zero. Report the test statistic and the p-value of the test.

(5 marks)

d)Reflect on the results you obtained from a), b) and c) and your acquired knowledge of the CAPM during the course, discuss if the CAPM works, or does not work for the subset of Nasdaq stocks that was assigned to you?(10 marks)

Attachments:

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