The S&P 500 is an index of stock prices for the largest corporations in America. It includes all the FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks.

Financial Markets and COVID-19

The data set “financial_data_ps3.dta” contains daily information on the closing price of the S&P 500 stock, gold, bitcoin, as well as the interest rate on the U.S. 10-year Treasury note from January 2015 to October 2020. These data were retrieved from Yahoo finance. The following table defines the variables in this data set:

 Before you begin, however, please read through these important instructions:

·  be sure to write your name on this page! Please submit your assignment by Midnight (CA time) Friday, December 11th. (Note: You will lose a full grade point (e.g., from A- to B-) for turning in your assignment one day late. No submissions will be accepted after Saturday December 12th.) The submission process involves two steps, both of which are required to receive full credit for the Problem Set:

o   Part 1: Upload your Stata do-file to the Problem Set 3 Assignment on Canvas. You will lose a full grade point if you do not submit the Stata do-file.

o   Part 2: Upload your PDF via Gradescope. If you have any questions about how to upload via Gradescope, please consult this helpful page: https://help.gradescope.com/article/ccbpppziu9-student-submit-work

·    You are permitted to discuss the assignment with your classmates, but all estimation and write-up should be done independently. Assignments like this are designed for you to generate your own ideas, and this should be reflected in your submitted work. We will be looking out for evidence that each student is submitting their own work and not that of classmates.

·         You have a few options for how to enter your responses. This PDF is fillable, which means you can type out your responses in the boxes provided. (Note: It is highly recommended that you print your final document as a PDF file and read over your submission to make sure everything is as you want it before uploading to Gradescope.) You can also handwrite your responses on a printed copy of the document, scan that document as a PDF, and upload the submission. Alternatively, you could handwrite answers using a tablet. If you choose to handwrite your responses, be sure to keep your handwriting within the boxes provided for each question. Answers outside of the boxes are liable to be missed by Gradescope, resulting in unnecessary points lost.

·  When typing out equations, you may use lower-case letters in parentheses instead of subscripts. For example, Y(i) is accepted in place of 𝑌𝑖𝑖. If you are handwriting your responses, please use subscripts for full credit.

·   In order to open “financial_data_ps3.dta”, go to “File – Open”, and locate your local drives where this dtafile is saved.

o   For Windows users, your local drives should be under “This PC” - “C on {your computername}.”

o   For Mac users, "This PC" - "[folder name] on [your computer name]." The folder is theone which you set up first in "Preference - General tab" in Microsoft Remote Desktop App when you install Stata. You should move “financial_data_ps3.dta” to this folder.

·     All the Stata commands have useful documentation with examples. If you want to see these documents, you can type “help [command name].”

o   For example, if you type “help reg” in Stata, a new window will be open and provide a detailed information on syntax, options, and examples for reg command.

 1 time trend is a numerical variable that goes from 1 to T, where T is the total number of days in the dataset.

3.  [5 points] Briefly explain how the Newey West procedure addresses the serial correlation problem.

 What changed, what did not change, and why?

2 To conduct the Newey West procedure use the Stata command newey. Do not forget to specify the number of lags.

3 (Hint: They should equal to 0 before the relevant date and 1 afterwards.) Include the new COVID dummy variables in your basic dynamic regression to predict S&P 500 prices.

 a)      [2 points] Write down your model

b)      [3 points] Does it make sense to also include the lagged dummy variables? Why or why not?

3 date is a numerical variable with the corresponding date (year-month-day).

c)      [5 points] Report the results in table form 

 Did COVID-19 affect S&P 500 prices? Did the request for stimulus? Explain providing enough details on your tests: null hypothesis, test statistic, critical value. Use a significance level of 5%

6.      [5 points] In Question 5, what estimator did you use, and why?

Estimate the following equation using the Newey West procedure with the same number of lags as in question 4:𝑔𝑜𝑙𝑑𝑡  = Β0  + Β1𝑔𝑜𝑙𝑑𝑡−1  + Β2𝑡𝑖𝑖𝑚𝑒𝑡𝑟𝑒𝑛𝑑𝑡  + Β3𝑃𝑎𝑛𝑑𝑒𝑚𝑖𝑖𝑐𝑡  + Β4𝑆𝑡𝑖𝑖𝑚𝑢𝑙𝑢𝑠𝑡  + 𝑢𝑡 

How did COVID-19 pandemic and stimulus affect the demand for gold, as reflected in gold prices? Are these results significant at 5%? Please explain providing enough details on your tests: null hypothesis, test statistic, critical value.

8.      [5 points] Bitcoin (BTC) has swept the world with a new and, for many people, confusing asset, seemingly created from “thin air” (though it really is created by a mathematical equation, which limits the total supply of BTC to exactly 21 million, unlike the supply of national currencies in the world, which can be increased infinitely by central banks running their money presses). The COVID- 19 pandemic created a lot of uncertainty in the world, and governments printed new money to support their stimulus policies (like the US did to send a $1,200 check that many Americans received this year).

Estimate a model to test whether the COVID-19 pandemic and the stimulus changed the demand for BTC, as reflected in BTC prices. (Hint: the model should be similar in spirit to the one estimated in question 7). How did COVID-19 pandemic and stimulus affect the demand for bitcoin, as reflected in bitcoin prices? Are these results significant at 5%? Please explain providing enough details on your tests: null hypothesis, test statistic, critical value.