AF7004 - Financial Econometrics and Forecasting I Assignment

Assignment Task

Section A 

Construct a portfolio of stocks from the US market and using EViews analyse its performance based on the estimates from the Fama – French (1992, 1993) and Carhart (1997) models.

You are required to answer the two questions listed below. Please follow the instructions in these questions.

Requirements

• Select 10 stocks listed on the US market and explain your choice. You may apply such selection criteria as market indicators (P/E, P/BV, DY ratios etc.) or any other selection rule, which you can reasonably justify. The period of analysis should be the last full 10 calendar years from January 2012 to

December 2021 and the data frequency should be monthly. Download the stock price data from Bloomberg and construct a portfolio from your stocks. Calculate the monthly returns of this portfolio in the entire 10-year period: 2012-2021.

Using Eviews perform estimation of parameters of Fama – French and Carhart models in the entire sample (10 years) covering 120 monthly observations. The data for the Fama – French and Carhart models factors for the US market can be found at Prof Kenneth French’s website using the following link:

The three Fama and French (1992,1996) factors RmRf, SMB, HML can be found in the .csv file under the “Fama/French 3 Factors” and the Carhart’s (1997) MOM factor can be found in the .csv file under “Sorts Involving Prior Returns” “Momentum Factor Mom”.

Divide the whole sample into 10 annual periods and investigate how the estimation results change in these sub-samples in case of your portfolio.

Discuss the econometric issues, which are related to your estimations.

• Discuss your estimation results in terms of the evaluation of your portfolio performance in the whole period and in all 10 annual sub-periods. Analyse the existence of small stocks effect, value premium effect and momentum effect in your portfolio and explain your results in line with the asset pricing theories.

Section B

Using the data from the US stock market, analyse the extent of the intervalling effect in the estimation of stocks’ beta ( β ) parameters.

You are required to answer the two questions listed below. Please follow the instructions in these questions.

Requirements

• Select 15 companies from the US market and download their stock price data from Bloomberg. The sample period should include the last full 5 calendar years: from 2017 to 2021. Your selection should cover companies of different sizes, i.e. 5 large stocks, 5 medium size stocks and 5 small stocks. Discuss briefly the stocks which you have chosen and then use the CAPM model (in the market model version, i.e. without a deduction of the risk free rate) to estimate in EViews their betas ( β ) for daily and monthly frequency data. Discuss the econometric issues, which are related to your estimations.

• Summarize and discuss your findings about the extent of the intervalling effect in the estimation of the beta ( β ) parameter in case of all your 15 stocks and discuss any patterns that you found across your results from the point of view of the differences in daily and monthly beta ( β ) estimates and the stocks size.

Section C

Using the data in the excel file “Panel Data” uploaded on the modules’ Blackboard site, identify and discuss the determinants of capital structure of the selected firms. Please note that the panel data is unbalanced. The file is uploaded under the “Assessment and Submission folder of the module’s Blackboard Site”. The file consists of following firm-specific factors: liquidity (nwc), risk (beta), dividend payment- pay dividend or not (dividend), firm size(size), profitability measured using return on assets (roa) and capital structure (lev). The “dividend” variable is a binary variable which takes a value of 1 if the firm pays dividend and 0 if the firm does not pay the dividend. The data is already in the panel data format.

Requirements

• Briefly explain the advantages of panel data
• Upload the data in Eviews and estimate the appropriate panel data model by performing the required tests to identify the determinants of the capital structure of firms
• Clearly explain and discuss the model results

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