Q4. You analyze the non-linear relationships of two financial securities by fitting both a linear and a quadratic function with EXCEL
ret_A = a + b1 * ret_B + error
Coefficients |
Standard Error of coefficients |
|
A |
0.0000 |
0.0006 |
b1 |
-1.978 |
0.025 |
and
ret_A = a + b1 * ret_B + b2 * ret_B2 + error
variable |
Coefficients |
Standard Error of coefficients |
|
a |
0.0000 |
0.0006 |
|
b1 |
-1.850 |
0.0245 |
|
b2 |
4.45 |
0.382 |
|
t-stat = 4.45/0.382 = 11.649
p value for a two tailed t-test needs to be calculated, consider degrees of freedom = 100. Probability is less than 0.00001 as the critical values corresponding to such probability is lower than calculated t-statistic. Therefore the non-linear effect is significant
ret_A = -1.978*-1% = 1.978%
ret_A = -1.850*-1% + 4.45*(-1%)^2 = 1.850% + 0.0445% = 1.8945%
ret_A = -1.978*-5% = 9.89%
ret_A = -1.850*-5% + 4.45*(-5%)^2 = 9.25% + 1.1125% = 10.3625%
ret_A = -1.978*5% = -9.89%
ret_A = -1.850*5% + 4.45*(-5%)^2 = -9.25% + 1.1125% = -8.1375%
Q4. You analyze the non-linear relationships of two financial securities by fitting both a linear and a quadratic function with EXCEL linear model ret_A = a + b1 * ret_B + error Coefficients...
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