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Economics homework helpmarketFinancialThe entire problem set 3J. Edward Taylor Fall 2020Your Name __________________________________ARE 106Quantitative MethodsProblem Set 3Due before midnight on Friday, December 11, 2020Financial Markets and COVID-19The 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 since January 2015 to October2020. These data were retrieved from Yahoo finance. The following table defines the variables in this dataset:Variable Variable name in Stata DescriptionDate date Year-month-dayTime trend timetrend Numerical variable that goes from 1 to TClosing price of S&P 500 stock sp500_close Closing price in US dollarsClosing price of gold gold_close Closing price in US dollarsClosing price of bitcoin bitcoin_close Closing price in US dollarsInterest rate on the U.S. 10-yearTreasury notetreasury_close Interest rateBefore 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 inyour 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 theProblem Set:o Part 1: Upload your Stata do-file to the Problem Set 3 Assignment on Canvas. You willlose 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 uploadvia 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 writeup should be done independently. Assignments like this are designed for you to generate yourown ideas, and this should be reflected in your submitted work. We will be looking out forevidence that each student is submitting their own work and not that of classmates.J. Edward Taylor Fall 2020• Enter your answers onto this document in the space provided. More than enough space isprovided, so do not worry about filling up the space! Focus more on the quality of yourresponses than on the quantity of words used in the responses.• You have a few options for how to enter your responses. This PDF is fillable, which meansyou can type out your responses in the boxes provided. (Note: It is highly recommended thatyou print your final document as a PDF file and read over your submission to make sureeverything is as you want it before uploading to Gradescope.) You can also handwrite yourresponses on a printed copy of the document, scan that document as a PDF, and upload thesubmission. Alternatively, you could handwrite answers using a tablet. If you choose tohandwrite your responses, be sure to keep your handwriting within the boxes provided for eachquestion. Answers outside of the boxes are liable to be missed by Gradescope, resulting inunnecessary 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 . If you are handwriting your responses, please usesubscripts for full credit.• In order to open “financial_data_ps3.dta”, go to “File – Open”, and locate your local driveswhere this dtafile is saved.o For Windows users, your local drives should be under “This PC” – “C on {yourcomputername}.”o For Mac users, “This PC” – “[folder name] on [your computer name].” The folder istheone which you set up first in “Preference – General tab” in Microsoft RemoteDesktop Appwhen you install Stata. You should move “financial_data_ps3.dta” to thisfolder.• All the Stata commands have useful documentation with examples. If you want to see thesedocuments, you can type “help [command name].”o For example, if you type “help reg” in Stata, a new window will be open and providea detailed information on syntax, options, and examples for reg command.J. Edward Taylor Fall 20201. [5 points] The S&P 500 is an index of stock prices for the largest corporations in America. It includesall the FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks, but it also includes “old economy”stocks like United Airlines, Hilton Hotels, and Carnival Cruises. Estimate an OLS regression to predictthe S&P 500 price at close of each trading day, based on its close price the previous day and a timetrend. That is, use the model to capture basic dynamics that is Professor Taylor’s preferred startingmodel (see ppt for CH 9). Report your results. Hint: before running the regression, make sure to declarethe data to be a time series by typing tsset timetrend in Stata.1Variables EstimatedCoefficientStandard Error t-statistic 95% Confidence IntervalLower UpperS&P 500 (t-1)Time trendConstantSample size21 timetrend is a numerical variable that goes from 1 to T, where T is the total number of days in the dataset.J. Edward Taylor Fall 20202. [5 points] Is there evidence of serial correlation in this model at 5% of significance? Please writedown the auxiliary model, the null hypothesis, the test statistic and the critical value. DO NOT USETHE CANNED COMMAND THAT DOES THIS TEST IN STATA! We want to see how you did it.J. Edward Taylor Fall 20203. [5 points] Briefly explain how the Newey West procedure addresses the serial correlation problem.J. Edward Taylor Fall 20204. [5 points] Now re-estimate this basic dynamics model using the Newey West procedure with 6 lags.2(It is fairly common to set the number of lags equal to the integer part of T1/4, which satisfies theconditions in Newey and West’s seminal paper.) Report your results and compare them to the results yougot using OLS.Variables EstimatedCoefficientStandard Error t-statistic 95% Confidence IntervalLower UpperS&P 500 (t-1)Time trendConstantSample size2What 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.J. Edward Taylor Fall 20205. On 20200225, the World Health Organization (WHO) announced that COVID-19 was becoming apandemic. On 20200317 U.S. President Trump requested Congress to send Americans direct financialrelief, in the form of stimulus checks and other measures. Please use the variable date in the dataset tocreate two dummy variables, one for each of these two events.3 (Hint: They should equal to 0 beforethe relevant date and 1 afterwards.) Include the new COVID dummy variables in your basic dynamicregression to predict S&P 500 prices.a) [2 points] Write down your modelb) [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).J. Edward Taylor Fall 2020c) [5 points] Report the results in table formVariables EstimatedCoefficientStandard Error t-statistic 95% Confidence IntervalLower UpperS&P 500 (t-1)Time trendConstantSample size2Did COVID-19 affect S&P 500 prices? Did the request for stimulus? Explain providing enoughdetails on your tests: null hypothesis, test statistic, critical value. Use a significance level of 5%J. Edward Taylor Fall 20206. [5 points] In Question 5, what estimator did you use, and why?J. Edward Taylor Fall 20207. [5 points] People traditionally have viewed gold as a “safe haven” to put their money into at times ofuncertainty. The COVID-19 pandemic obviously ushered in a new era of uncertainty, whereas thepromise of stimulus attempted to alleviate this uncertainty.Estimate the following equation using the Newey West procedure with the same number of lags as inquestion 4:= Β0 + Β1 −1 + Β2 + Β3 + Β4 +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: nullhypothesis, test statistic, critical value.J. Edward Taylor Fall 20208. [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, whichlimits the total supply of BTC to exactly 21 million, unlike the supply of national currencies in theworld, which can be increased infinitely by central banks running their money presses). The COVID19 pandemic created a lot of uncertainty in the world, and governments printed new money to supporttheir stimulus policies (like the US did to send a $1,200 check that many Americans received thisyear).Estimate a model to test whether the COVID-19 pandemic and the stimulus changed the demand forBTC, as reflected in BTC prices. (Hint: the model should be similar in spirit to the one estimated inquestion 7). How did COVID-19 pandemic and stimulus affect the demand for bitcoin, as reflected inbitcoin prices? Are these results significant at 5%? Please explain providing enough details on yourtests: null hypothesis, test statistic, critical value.J. Edward Taylor Fall 20209. Some people consider BTC to be the “new digital gold.” If that is true, then BTC and gold pricescould be significantly related to one another.a) [5 points] Estimate the following equation and test for autocorrelation. What are the statistic andthe critical value?= Β0 + Β1 + 2 +Test statisticDegrees of freedom forcritical value (m)Critical valueWhat do you conclude?b) [5 points] Now estimate the following autoregressive distributed lagged model and test forautocorrelation.= 0 + 1 −1 + 2 + 3 −1 + 4 +Test statisticDegrees of freedom forcritical value (m)Critical valueWhat do you conclude?J. Edward Taylor Fall 2020c) [5 points] Using this autoregressive distributed lagged model, test whether gold prices aresignificantly correlated with bitcoin prices at a 5% significance level. What do you conclude?Explain providing enough details on your tests: null hypothesis, test statistic, critical value.J. Edward Taylor Fall 202010. People dream of getting rich by finding a way to predict stock prices. Our data set has information onS&P 500 stock prices as well as prices of gold, BTC, and the interest rate on the U.S. 10-year Treasurynote. Going into each new day of trading, we know the closing price of each of these assets—but only forthe previous trading day.a) [5 points] Write down an econometric model to predict the S&P 500 market close based on itsclosing price in the previous day, the closing price of gold and BTC in the previous day, and theinterest rate on the U.S. 10-year Treasury note in the previous day. Do not forget to include thetime trend as well.b) [5 points] Estimate this model using the Newey West procedure and 6 lags. Report your results.Variables EstimatedCoefficientStandard Error t-statistic 95% Confidence IntervalLower UpperConstantSample size2J. Edward Taylor Fall 2020c) [5 points] Based on your results, which, if any, of these variables significantly explains S&P 500performance at 5% level? Please explain providing enough details on your tests: null hypothesis,test statistic, critical value.
 
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