As a researcher at the financial economics research department of the Federal Reserve Bank of New York in the United States. You were tasked by your supervisor, Nigel, to analyse the predictive power of a number of financial market-based measure to aggregate market returns. Specifically, you were asked to analyse:
• How the aggregate dividend yield (DY), term spread (TERM) and variance risk premium (VRP) can predict ex post S&P 500 index returns. You were instructed to carry out the analysis with monthly dataset covering the period of Jan 1990 to Dec 2020.
Prepare an analysis report on the issues raised above. You are required to:
a) describe the data sources and present relevant statistics including (but not limited to) descriptive statistics, regressions outputs and pre- & post- regression diagnostic tests (50% of total marks);
b) discuss various econometrics issues (for e.g. serial correlation, stationarity of time series data, etc) related to the data you handle (40% of total marks);
c) discuss the limitations of your analysis whenever applicable (5% of total marks); and
d) discuss the implications of your findings (5% of total marks).
Show clear logic throughout the report. Make sure the way of presentation in the report is clear and easy to understand. Including test results that are irrelevant to the tasks listed above will affect the overall quality of the report.
Recommended Data Sources:
Financial databases, for e.g. Thomson Reuters DataStream, Bloomberg, WRDS, etc.
CBOE official website
Federal Reserve Bank of St Louis Federal Reserve Economic Data (FRED)
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