FIN5EME- Econmetrics of Financial Markets

Task:

Suppose you are a quantitative equity analyst working for an investment bank based in New York. Your team manager is responsible for the local US equity portfolio performance. There are ten NYSE equity securities with significant holdings in your investment bank’s portfolio.Your manager has given you the assignment to analyse the historical performance of one of these ten blue-chip stocks. You need to utilise few of the most prominent empirical asset pricing models - the three-factor Fama-French model (Fama and French, 1993); and a newlydeveloped empirical asset model by Fama and French five-factor (Fama and French, 2015).

Your manager has asked that each team member is to compare the historical performance of the assigned to you particular blue-chip stock by using regression analysis. The period is set to 20 in a random way which will be defined below. Historical time series of closing prices end-of-the-month prices of your stock, excess market returns and popular risk factors data for the period from January 1964 to December 2017 are provided to you.

The first sheet of this Excel spreadsheet is titled NYSE Stock Prices’. It contains historical monthly closing prices for ten blue cheap stocks listed on the NYSE. You are assigned to a particular blue-chip stock based on the last digit of your student ID number. For example, if the last digit of your ID is ‘1’, you should use the Caterpillar Inc. (CAT) stock data series ‘1’ which is in column C.

Perform the following activities:

1). Using data for your sub-period calculate and report in a table (Table 1) the descriptive statistics (mean, median, standard deviation, skewness, kurtosis, minimum and maximum) for both the price levels and price returns (relative prices) using logarithmic returns of your selected NYSE stock. Briefly comment on the results.

2). Provide separate time series plots of each variable to present: (i) price levels; (ii) returns; (iii) squared returns. Briefly comment on the results.(Hint: The squared return time series is used to indicate a price volatility time series).

3). Test for normality for the excess return series of your NYSE stock and the market (Hint: Test whether the excess return data are normally distributed.) Comment on the results.

4). Estimate Fama-French’s three-factor empirical asset pricing model (Fama and French,1993) using the market excess return (Rm-Rf), SMB and HML factors. Report the estimation output in a table (Table 2). Test the individual significance of the slopes of the estimated risk factors (Hint: a hypothesis test of the null that the estimate is equal to zero (‘0’)). Test the joint significance of the slopes of the estimated risk factors (Hint: perform a test of the null hypothesis that each of the three slope estimates is jointly equal to zero (‘0’)). Comment on the results.

5) Estimate the five-factor Fama-French (the full model) and the three-factor Fama-French empirical asset pricing models. Report the estimation output of the five-factor model in a table (Table 3). Compare the statistical significance of these two empirical asset pricing models. (Hint: perform statistical testing of the unrestricted model the (full) five-factor FamaFrench model and the restricted three-factor Fama-French model.) Comment on the results.