Ngoc Tran, Philip Rauh, Tim Kruse

Exercise 1 The simple linear regression model

The aim of the exercise is to examine the connectedness of the excess return of the GM stock
to the excess return of the S&P500 index. Therefore a simple linear regression model is used.
As result of running an OLS estimation with the excess return of GM as dependent variable
and the excess return of S&P500 as regressor one receives the following regression line:

This means that if the excess rate of the S&P500 index increases by 1%, the excess rate on the
GM stock increases on average by 1.1488 %. For an excess return of the S&P500 which
equals zero, one expects the return of the GM stock to lay on average 0.850644% below the
risk free rate.
Looking at the sample average of the residuals which comes out to be very low at a height of 6.6966e-016 the regression line seems to describe the connectivity between the excess return
of GM and S&P500 quite well. However, considering the coefficient of determination (R2)
one can see that only 15.8% of the variation of the excess return of the GM Stock can be
explained by the variation of the excess return of the S&P500 index.
To test the likelihood of different assumptions for the true parameter and an upper onetailed t-test was performed for and a lower one-tailed t-test was performed for , each on a
significance level of =5%. The corresponding data can be seen in the table below:

H0

=0

=1

H1

<0

>1

5%

5%

0.44

-0.71

0,24

0,33

t < 0 and < a

t > 0 and < a

H0 can not be rejected with an

H0 can not be rejected with a

upper one-tailed test

lower one-tailed test

Significance level
T-statistic

()

P-value
Decision rule: Reject if
Test result

On a significance level of 95% is not significant and has no influence on the variation of the
excess return of GM. Whereas there is evidence that is significant and has influence on the
excess return of GM on a significance level of 95%.

Ngoc Tran, Philip Rauh, Tim Kruse

The 95% confidence interval for is [

<

<[

= [0.471;1.827]. This represents the non-rejection area for the null hypothesis.

At least the joint Hypothesis which is given below was tested on a 5% significance level:
H0:

and

H1:

and/or

F-test(2;61) = 0.331 with p-value = 0.719

As p

a (0.719

0.05) Cannot reject H0 on 5% significance level.