Using Simple Regression Model to Explain the Relationship Between 3-Month T-Bill Rate and Dow-Jones Index

In: Business and Management

Submitted By tsai18
Words 1539
Pages 7
Using the simple regression model to explain the relationship between 3-Month T-bill rate and Dow Jones Index

Index 1. Introduction………………………………………………3

2. Modeling the relationship between the 3-Month T-bill rates and Dow Jones Index (First Model)……………………3

3. Hypothesis and Testing…………………………………...4

4. Empirical Analysis………………………………………...5

5. Further Comparison………………………………………5 6. Conclusion…………………………………………………7

7. Appendix……………………………………………………8

8. Reference…………………………………………………..10

1. Introduction

The 3-month T-bill rates and Dow Jones index are really close to the whole economic environment; the 3-month T-Bill rates are the preeminent default-risk-free rates in the US money market that is often used by researchers to proxy the risk-free asset whose existence is assumed by much conventional finance theory. Given their importance and visibility, it is not surprising that these interest rates has been studied extensively in economic and finance. Dow Jones Index, undoubtedly, is one of the most important economic indicators of the global financial market, This paper investigates the relationship between these two important economic data. In order to cover the business circle, the data which I choose is from 2001/01/01-2010/12/31, including the subprime lending crisis period. I use SAS and excel to get the information which indicates the relationship between these two representing data.

2. Modeling the relationship between the 3-Month T-bill rates and Dow Jones Index (First Model)

In order to present the relationship between the 3-Month T-Bill rates and Dow Jones index by our SAS output result, I constructed a single regression model:
(β0 = the intercept of 3-Month T-bill rate)
(β1 = the slope of Dow Jones Index)

3-Month T-Bill rate=-0.04883+0.00000670*Dow Jones Index

This means that when the Dow Jones…...

Similar Documents

The Relationship Between Real Interest Rates and Inflation

...The Relationship between Real Interest Rates and Inflation Michał Brzoza-Brzezina* Abstract In the recent decade, a huge amount of papers, describing monetary policy rules based on nominal interest rates, has been written. As it is, however, well known, it is in fact the real and not the nominal interest rate, that can influence spending decisions of enterprises and households and thus inflation. One way, to describe the relationship between real interest rates and inflation, is based on our experience with the monetary theory of the price level. The quantity theory of money can be used under certain assumptions as a good description of the long-run relationship between money and prices. In this respect the best known empirical application is probably the P-star model of Hallman, Porter and Small (1991). In this paper we use two simple descriptions of the long run link between real interest rates and inflation, and subsequently test their empirical performance, using similar techniques as employed in P-star modeling. In an empirical study, based on cointegration analysis, we show that the gap between the real and natural rate of interest does not determine inflation, as it is often postulated, but its growth rate. We find that this relationship describes reasonably well the long run influence of the interest rate gap on inflation. Simultaneously we calculate the average natural rate of interest. JEL: E31, E40. Keywords: Inflation, Natural Rate of Interest *) Research......

Words: 7742 - Pages: 31

Exchange Rate Random Walk Model

...USD/COP Exchange Rate: A Random Walk with a Variable Drift Peter Rowland Banco de la República* Abstract This study develops three exchange rate models as well as a simple statistical model defined as a random walk with a variable drift. The exchange rate models all use the purchasing power parity hypothesis to account for the long-term relationships between prices and the exchange rate, together with error correction models to represent any shortterm dynamics. The models are estimated for the USD/COP rate of exchange, and their forecast performance is compared to that of a simple random walk as well as to that of the random walk with a variable drift term. Two of the models are shown to outperform the simple random walk on the 12 and 24-months forecasting horizon. However, all the models are outperformed by the random walk with a variable drift, where the drift term is estimated using a Kalman filter. The results suggest that fundamental models might only be a useful tool for forecasting of the exchange rate in the very long run. The opinions expressed here are those of the author and not necessarily of the Banco de la República, the Colombian Central Bank, nor of its Board of Directors. I express my thanks to Luis Eduardo Arango, Javier Gómez, and Luis Fernando Melo for helpful comments and suggestions. Any remaining errors are my own. * Contents 1 2 2.1 2.2 2.3 2.4 2.5 2.6 3 3.1 3.2 3.3 3.4 3.5 3.6 4 4.1 4.2 4.3 5 Introduction Exchange Rate Models A Random......

Words: 13917 - Pages: 56

Regression Models

...Regression Models Student Name Grantham University BA/520 – Quantitative Analysis Instructor Name April 6, 2013 Abstract This paper will refer to regression models and the benefits that variables provide when developing and examining such models. Also, it will discuss the reason why scatter diagrams are used and will describe the simple linear regression model and will refer to multiple regression analysis as well as the potential uses for this type of model. Regression Models Regression models are a statistical measure that attempts to determine the strength of the relationship between one dependent variable (usually denoted by Y) and a series of other changing variables (known as independent variables). Regression models provide the scientist with a powerful tool, allowing predictions about past, present, or future events to be made with information about past or present events. Inference based on such models is known as regression analysis. The main purpose of regression analysis is to predict the value of a dependent or response variable based on values of the independent or explanatory variables. According to Render, Stair, and Hanna (2011) they are two reasons for which regression analyses are used: one is to understand the relation between various variables and the second is to predict the variable's value based on the value of the other. Variables provide many advantages when creating models. One of the......

Words: 1282 - Pages: 6

Three-Month Exchange Rate Forecasting Between Usd and Jpy

...Three-month Exchange Rate Forecasting between USD and JPY Abstract This paper aims at the forecast of USD-JPY exchange rate on 1st May, 2012 based on the data collected before 1st Feb. 2012. The result proves satisfactory predictions when summarize using the fundamental forecasting, market-based forecasting and mixed forecasting all into consideration. The use of PPP gives the most accurate prediction comparing with the real rate of 1st May, 2012, though the exchange rate is actually affected by several other facets. The paper further discusses the advantages and lack points of each method, so that the forecasting errors can be comprehended. Key Words Exchange Rate Forecasting Regression Analysis PPP IFE Forecasting Error Introduction With the development of our society, globalization has become an inevitable trend. Since the late twentieth century, financial permeation has become a profound and widespread issue. Exchange rate, an important link of international financial relationship, has almost penetrated into every corner of economics and played an increasingly significant role in our life. Therefore, it is of great meaning for investment and management to forecast the exchange rate. Ever since Meese and Rogoff (1983) initiated the research on out-of-sample forecasting that has become standard procedure for exchange-rate model validation, work in this area has discovered three things. First, the particular time-period of the sample......

Words: 4707 - Pages: 19

The Success of Bill T. Jones’ Film Still/Here

...The film, Still/Here choreographed by Bill T. Jones in 1994 is a remarkable film that Jones first gathered the ideas of when his late partner, Arnie Zane, died from AIDS at the age of 39. Jones then wanted to incorporate the thoughts and emotions that are brought up in the uneventful situations of surviving life threatening illnesses into dance. Still/Here consists of nothing but human feelings that are expressed through rhythmic togetherness on stage to create an amazing array of dance that visually grasps the audience to interpret the stories that lie underneath. This film could not have been as successful as it was without Jones’ willingness to help others through the workshops, using real peoples emotions and stories to create the dance, and incorporating the audio- and video-tapes throughout the dance performance. These three things are key to the success of his film. In order to explain why Still/Here was so successful I feel it is very important to understand why Bill T. Jones has created a dance such as this one. As we know, Bill T. Jones is an African American, homosexual, HIV positive man whose life partner died from AIDS. This is important because it helps us to understand the meaning behind the structure and choreography he has chosen. During Jones’ interview he explains that after Arnie’s death he was full of confusion and other emotions which lead him to the idea of Still/Here.Dance was a big part of both of their lives, Jones found a way to express real......

Words: 1509 - Pages: 7

Forecasting Gold Prices Using Multiple Linear Regression Method

...Forecasting Gold Prices Using Multiple Linear Regression Method Z. Ismail, 2A. Yahya and 1A. Shabri Department of Mathematics, Faculty of Science 2 Department of Basic Education, Faculty of Education University Technology Malaysia, 81310 Skudai, Johor Malaysia 1 1 Abstract: Problem statement: Forecasting is a function in management to assist decision making. It is also described as the process of estimation in unknown future situations. In a more general term it is commonly known as prediction which refers to estimation of time series or longitudinal type data. Gold is a precious yellow commodity once used as money. It was made illegal in USA 41 years ago, but is now once again accepted as a potential currency. The demand for this commodity is on the rise. Approach: Objective of this study was to develop a forecasting model for predicting gold prices based on economic factors such as inflation, currency price movements and others. Following the melt-down of US dollars, investors are putting their money into gold because gold plays an important role as a stabilizing influence for investment portfolios. Due to the increase in demand for gold in Malaysian and other parts of the world, it is necessary to develop a model that reflects the structure and pattern of gold market and forecast movement of gold price. The most appropriate approach to the understanding of gold prices is the Multiple Linear Regression (MLR) model. MLR is a study on the relationship between a single......

Words: 3920 - Pages: 16

Whether the Interest Rate Pushes Equity Risk Premium Rate Up?

...Introduction: We know the fact that low interest rate affects stock market price. Low interest rate decreases the cost of capital and increases the confidence of investors. The equity risk premium is the "extra return" that investors collectively demand for investing their money in stocks instead of holding it in a risk less or close to risk less investment. As a consequence, equity risk premium reflects both investor hopes and fears about stocks, rising as the fear factor increases. As a measure the equity risk premium can be an individual stock or the overall stock market provides over a risk-free rate. And the size of the premium will be a standard to compensate with a higher premium in the stock market. Thus, a portfolio manager when the equity risk premium increases in the future, the investors will sell out stock market because the stocks are over priced. So the legislators and pension administrators decide how much to set aside to meet future pension obligations, based upon assessments of equity risk premiums. However the history data of ERP (Equity Risk Premium) from Federal Reserve System shows it keeps low and stable state but increases suddenly since 2006. At the same time the Federal Funds Effective Rate goes down and keeps low state. We know that interest rate is a way to control inflation. Inflation is a factor causes too much money chasing too few goods. “Changes in the federal funds rate affect the behavior of consumers and......

Words: 3534 - Pages: 15

Dow Jones Index

...Course- Introduction To Business Name- Mohammad Mowla Date- 11/04/13 Case Assignment # 2 Dow Jones Index ( McDonald's ) The Dow Jones Industrial Average is average price of 30 stoccks traded on the New York Stock Exchange and Nasdaq. Charles Dow invented Dow Jones Industrial Average in 1896. Companies like General Electric, Disney, Exxon and Microsoft includes in the Dow Jones Industry Average. DJIA is one of the single and oldest index in the world. Roy Kroc discovered a small burger restaurent in california. From that time now it serve to 118 countries now with more than 34,000 restaurents serving nearly 69 millio people everyday.In 1961, Ray launched a training program, later called Hamburger University, at a new restaurant in Elk Grove Village, Illinois. There, franchisees and operators were trained in the scientific methods of running a successful McDonald’s. Hamburger U also had a research and to develop new cooking, freezing, storing and serving methods. Today, more than 80,000 people have graduated from the program. Sustainability is an important focus for McDonald’s. Their sustainability efforts shows that their business policies and practices complements their company and makes a positive impact on societies it’s involved in. McDonald’s rising and continual existence is very significant, along with numerous opportunities and expectations. It is employing over 1.8 million employees all around the world in over 118......

Words: 485 - Pages: 2

Relationship Management Index Using Holistic Approach

...Relationship Marketing Index Using Holistic Approach A project report submitted in partial fulfilment of the requirements for B.Tech. Project B.Tech. By Katum Yomcha (2010IPG-50) Divyank Shekhar Singh (2010IPG-34) Pradeep Kr. Meena(2010IPG-109) ABV INDIAN INSTITUTE OF INFORMATION TECHNOLOGY AND MANAGEMENT GWALIOR-474 010 2013 CANDIDATE/S DECLARATION We hereby certify that the work which is being presented in the B. Tech. Project Report entitled “Relationship Marketing Index Using Holistic Approach”, in partial fulfillment of the requirement for the award of the Degree of Bachelor of Technology and submitted to the institution, is an authentic record of our own work carried out during the period from May/2013 to September/2013 under the supervision of Prof. Deepali Singh. I/we also cited the reference about the text(s)/figure(s)/table(s) from where they have been taken. The matter presented in this report has not been submitted by us for the award of any other degree elsewhere. Date: Signature of Candidates Katum Yomcha Divyank Shekhar Singh Pradeep Kr. Meena (2010 IPG 050) (2010 IPG 034) (2010 IPG 109) This is to certify......

Words: 9270 - Pages: 38

Regression Model for State Suicide Rate in the U.S.

...overall education level of people, and then we expect suicide rate will be lower according to this action. If we find out that the suicide rate for some specific age group is relatively higher than the other groups, we may set up some program providing help specifically to this group. This research will also be interesting, because we want to examine if the regression result is in compliance with our common sense (what effect on suicide rate there will be for each different variable). This will be discussed in more details in part B. Part B: Research design – motivation and estimation of independent / dependent variables Dependent Variable (Y) – Suicide rate This is just what we want to do research on, and the way it is calculated is as following: Independent Variable (X) Education impact (High school completion rate, and % of population get Bachelor’s degree or more), calculated as People with higher education tend to be better at adapting themselves to shocks, difficulties and failures. So, we decide to use high school completion rate and % of people who get Bachelor’s degree or more as our regressor, and we expect the higher these two rates are, the lower the suicide rate should be (the coefficient should be negative). Age impact (% of people aged between 15 and 44), calculated as: According to the research of Centers for Disease Control and Prevention, the suicide rate among people aged between 15 and 44 are somewhat flat while those who are aged......

Words: 2728 - Pages: 11

Relationship Between Economic and Financila Sector Development

...DEPARTMENT OF ECONOMICS AND FINANCE COLLEGE OF BUSINESS AND ECONOMICS UNIVERSITY OF CANTERBURY CHRISTCHURCH, NEW ZEALAND Conditional Correlations and Volatility Spillovers Between Crude Oil and Stock Index Returns Roengchai Tansuchat, Chia-Lin Chang, Michael McAleer WORKING PAPER No. 4/2010 Department of Economics and Finance College of Business and Economics University of Canterbury Private Bag 4800, Christchurch New Zealand WORKING PAPER No. 4/2010 Conditional Correlations and Volatility Spillovers Between Crude Oil and Stock Index Returns Roengchai Tansuchat1, Chia-Lin Chang2, Michael McAleer3 January, 2010 Abstract: This paper investigates the conditional correlations and volatility spillovers between crude oil returns and stock index returns. Daily returns from 2 January 1998 to 4 November 2009 of the crude oil spot, forward and futures prices from the WTI and Brent markets, and the FTSE100, NYSE, Dow Jones and S&P500 index returns, are analysed using the CCC model of Bollerslev (1990), VARMA-GARCH model of Ling and McAleer (2003), VARMA-AGARCH model of McAleer, Hoti and Chan (2008), and DCC model of Engle (2002). Based on the CCC model, the estimates of conditional correlations for returns across markets are very low, and some are not statistically significant, which means the conditional shocks are correlated only in the same market and not across markets. However, the DCC estimates of the conditional correlations are always significant. This result makes it......

Words: 11901 - Pages: 48

Relationship Between Stock Price and Futures

...The relationship between stock prices and exchange rates in China Mengyuan Chen Illinois Wesleyan University Dec 10, 2012 Abstract This paper uses the data of RMB exchange rates and stock market prices in China from 1994 to 2011 to estimate the relationship between stock prices and exchange rates. There are two major theories concerning the relationship. According to the portfolio balance effect, these two variables should be negatively related; in addition, according to the international trading effect theory, these two variables should be positively related. The linear regression model is adopted to observe the various relationships between stock and foreign exchange markets. The results confirmed my hypothesis, which indicates that the international trading effect is more dominant, thus the net effect is a positive causal relationship from exchange rates to stock prices. I. Introduction Within the emerging Chinese market, China now has more open policies and advanced financial market instruments to promote globalization. For example, China started to allow the RMB to float within a larger daily range in 2005 and brought derivative options into the stock market. These significant steps all suggest that China is beginning to face a new economic condition. For instance, the challenging policy making of RMB exchange rate is one. Exchange rates and stock prices are both key indicators of the economy and financial markets. So the relationship between those two becomes......

Words: 2999 - Pages: 12

Relationship Between Exchange Rate and Inflation

...The Relationship Between Exchange Rate and Inflation in Pakistanby Shagufta KashifAbstractThere has been a long-standing interest in studying the factors that are responsible for uneven vacillation in the stable growth of the world economies. Lots and lots of theoretical literature and empirical evidences have addresses this issue in the past. Hike in prices of goods and services and foreign exchange are two important aspects which are deemed responsible for such potholed fluctuations in the economic growthThe volatility of the nature of prices is a major source of concern in all countries since 1970s. The issue is of a more serious nature in the developing countries where inflation in foreign countries known as “imported inflation” is seen to be driving “local/domestic inflation”; making domestic policies to control inflation ineffective. Similarly, in Pakistan, the domestic price level rose from the mid-1970s. The exchange rate started depreciating continuously from the early 1980s. Continuous devaluation of currency and inflation in the 1980s seems to suggest a correlation between the two variables.The studies by Rana and Dowling (1983) suggest that foreign inflation is the most influencing factor in explaining the change in local price level in nine less-developed countries of Asia during the period 1973-79. This study suggests that these countries cannot exercise much control over domestic inflation, however, the policies of their major trading partners (through exchange...

Words: 5793 - Pages: 24

The Impact of Derivatives on Stock Market Volatility: a Study of the Nifty Index

...AAMJAF, Vol. 4, No. 2, 43–65, 2008 ASIAN ACADEMY of MANAGEMENT JOURNAL of ACCOUNTING and FINANCE THE IMPACT OF DERIVATIVES ON STOCK MARKET VOLATILITY: A STUDY OF THE NIFTY INDEX T. Mallikarjunappa1* and Afsal E. M.2 1 Department of Business Administration, Mangalore University, Mangalagangotri – 574199, Mangalore, DK, Karnataka, India 2 School of Management and Business Studies, Mahatma Gandhi University, P.D. Hills, Kottayam – 686560, Kerala State, India *Corresponding author: ABSTRACT This paper studies the volatility implications of the introduction of derivatives on stock market volatility in India using the S&P CNX Nifty Index as a benchmark. To account for non-constant error variance in the return series, a GARCH model is fitted by incorporating futures and options dummy variables in the conditional variance equation. We find clustering and persistence of volatility before and after derivatives, while listing seems to have no stabilisation or destabilisation effects on market volatility. The postderivatives period shows that the sensitivity of the index returns to market returns and any day-of-the-week effects have disappeared. That is, the nature of the volatility patterns has altered during the post-derivatives period. Keywords: conditional volatility, heteroscedasticity, volatility clustering, market efficiency INTRODUCTION The modelling of asset returns volatility continues to be one of the key areas......

Words: 9589 - Pages: 39

Dow 30 Case

...Dow 30 Case Table of Contents 1.1 Bordered Covariance Matrix 3 1.2 Determination of Target Return 3 1.3 Solver Parameter 4 1.4 Efficient Frontier Creation 4 1.5 Asset Weights 5 1.6 Weekly Rebalancing 6 1.7 Portfolio Calculations 6 2.0 Firm Analysis: Home Depot 7 2.1 Trends 7 2.2 Analysis of current Macro-economic conditions 8 3.0 Analysis of Return & Benchmark 8 4.0 Analysis of Porter’s Five Forces 10 4.1 Intensity of Competitive Rivalry 10 4.2 Threat of entry for new competition 10 4.3 Threat of Substitutes for Product & Services 11 4.4 Supplier Power 11 4.5 Buyer Power 11 4.6 Closing Remarks 11 5.0 P/E 12 6.0 Individual Company Analysis 12 6.1 Growth ratios: 13 6.2 Gross profit margin: 13 6.3 Financial Strength: 14 6.4 Efficiency ratios: 14 6.5 Management Effectiveness: 14 7.0 Dividend Discount Model Analysis 16 7.1 Calculations 17 7.2 Methodology & Result 17 8.0 Modeling: Free Cash Flow to Firm & Free Cash Flow to Equity 18 Appendix A 22 Appendix B 25 1.0 Asset Allocation Model 1.1 Bordered Covariance Matrix The chapter 7 in class spreadsheet model was a strong foundation that helped teach the group how to find an optimum portfolio. To create our portfolio model, a bordered covariance matrix and an efficient frontier was developed to find our minimum variance portfolio in the DOW 30 trading case. A screen shot of our model developed on October the 8th, 2010 is in......

Words: 5776 - Pages: 24