Simple returns in percentage

AXP
20 15 10 5 0 -5 -10 -15 -20 99 00 01 02 03 04 05 06 07 08

Log returns in percentage

LAXP
20 15 10 5 0 -5 -10 -15 -20 99 00 01 02 03 04 05 06 07 08

CAT
15 16 12 8 5 4 0 -4 -8 -10 -12 -16 99 00 01 02 03 04 05 06 07 08 99 00 01 02

LCAT

10

-5

-15

03

04

05

06

07

08

SBUX
20

LSBUX
20

10

10

0
0

-10
-10

-20
-20

-30
-30 99 00 01 02 03 04 05 06 07 08

-40 99 00 01 02 03 04 05 06 07 08

Econ 604 Assignment 1 Omotola Awojobi (std number 116061) Solution for 1.1 From the Eviews workfile, axp1, cat1, and sbux1 are the raw data for simple returns; we then denote the simple returns expressed in percentage as axp, cat, and sbux. [i.e., axp=axp1*100] The log transformed data for the simple returns in percentage is denoted with laxp, lcat, and lsbux. The transformation for log returns is generated from the eviews with laxp=log(axp1+1)*100. The descriptive statistics results for both simple and log returns are shown in tables below;
Daily log returns Mean Std. Dev. Skewness Kurtosis *Excess Kurtosis Maximum Minimum Jarque-Bera Probability Observations Std. Error t-statistic LAXP LCAT LSBUX -0.015 0.036 0.012 2.453 2.171 2.696 -0.337 -0.202 -0.597 9.494 7.701 15.908 6.494 4.701 12.908 16.489 13.735 13.659 -19.352 -15.686 -33.249 4466.84 0 2515 0.049 -0.316 2332.785 0 2515 0.043 0.830 17609.95 0 2515 0.054 0.221

Daily simple returns AXP CAT SBUX Mean 0.015 0.060 0.048 Std. Dev. 2.446 2.170 2.683 Skewness -0.035 0.012 -0.082 Kurtosis 9.055 7.459 11.755 *Excess Kurtosis 6.055 4.459 8.755 Maximum 17.927 14.723 14.635 Minimum -17.595 -14.518 -28.286 Jarque-Bera Probability Observations Std. Error t-statistic 3842.8 0 2515 0.049 0.299 2083.779 0 2515 0.043 1.375 8034.99 0 2515 0.053 0.898

*Since kurtosis is 3, excess kurtosis is kurtosis minus 3 Testing hypothesis of zero expected mean To test if the mean of the log returns of each stock is zero, we set our hypotheses, Null Hypothesis H0: mean of log returns equals zero Alt. Hypothesis H1: mean of log returns is not zero We reject the null hypothesis if the t-statistic estimated falls beyond the 5 percent confidence limit, i.e. if p value is less than 0.05 t-statistic (log variable) = mean/std error LAXP-log returns for American Express: t-statistics = -0.015/[2.453/(2515)^0.5] = -0.316 Degree of freedom = N-1 =2514

p-value = TDIST(0.316, 2514, two-tailed) = 0.752 imported from excel The result for p value is far greater than the 0.05 confidence limit, this implies that the hypothesis of zero expected return cannot be rejected at the 5 percent confidence interval.

LCAT - log returns for Caterpillar: t-statistics = 0.036/[2.171/(2515)0.5] = 0.830 Degree of freedom = N-1 =2514 p-value = TDIST(0.830, 2514, two-tailed) = 0.406 imported from excel The result shows that the hypothesis of zero expected return cannot be rejected for CAT stocks at the 5 percent confidence interval.

LSBUX - log returns for Starbucks: t-statistics = 0.012/[2.696/(2515)0.5] = 0.221 Degree of freedom = N-1 =2514 p-value = TDIST(0.221, 2514, two-tailed) = 0.825 imported from excel For Starbucks stock as well, result shows that the hypothesis of zero expected return cannot be rejected at the 5 percent confidence interval. We conclude that, based on the sample data applied for this exercise, the zero mean expectation holds for all the stocks. This implies that the price of these stocks have not significantly changed

Solution for 1.4 Testing hypothesis for skewness and excess kurtosis LAXP a. We test if skewness of the log returns for American express stock is zero, Null Hypothesis H0: skewness (SLAXP) measure of the returns is zero Alt. Hypothesis H1: skewness (SLAXP) measure of the returns is not zero We reject the null hypothesis if the t-statistic estimated falls beyond the 5 percent confidence limit, i.e. if tprobability is less than 0.05 t-statistic (skewness) = SLAXP/[(6/T)0.5] = -0.337/[(6/2515)0.5] = -6.892 p-value (skewness) = TDIST(6.892, 2514, two-tailed) = 0.000 From the t-table, t-statistic @5% level of significance and df 2514 is 1.96. Since t-statistic (skewness) falls beyond the range of -1.96 and 1.96, we reject the null hypothesis and conclude that skewness measure of log

returns distribution for American Express is significantly different from zero. The log returns are significantly skewed to the left.

b. Test for excess kurtosis of the log returns for American express stock, Null Hypothesis H0: excess kurtosis (KLAXP-3) measure of the returns is zero Alt. Hypothesis H1: excess kurtosis (KLAXP-3) measure of the returns is not zero We reject the null hypothesis if the t-statistic estimated falls beyond the 5 percent confidence limit, i.e. if p value is less than 0.05 t-statistic (excess kurtosis) = (KLAXP-3)/[(24/T)0.5] = 6.494/[(24/2515)0.5] = 66.478 p-value (excess kurtosis) = TDIST(66.478, 2514, two-tailed) = 0.000 Since p value (kurtosis) is far below the 5% significance, we reject the null hypothesis and conclude that excess kurtosis of log returns distribution for American Express is significantly different from zero. The log returns got fat tail.

Solution for 1.5 a. See eviews workfile title Tola_604wf1_5. PC_CAD is for single period percentage change in exchange rate generated with genr pc_cad=(cad1/cad1(-1)-1)*100 from eviews; same applies to other currencies. LPC_CAD is for log returns in percentage, generated with genr lpc_cad=log((pc_cad/100)+1)*100.

b.
LPC_CAD LPC_EURO LPC_POUND LPC_YEN -0.006819 0.01099 -0.005747 -0.002185 0.587648 0.653943 0.617662 0.663232 -0.239039 0.126013 -0.395083 -0.67105 11.25503 5.809502 10.06983 7.587413 8.25503 2.809502 7.06983 4.587413 3.806962 -5.071599 6615.186 0 2322 4.620792 -3.003101 769.8224 0 2322 4.434858 -4.96625 4896.208 0 2322 2.708365 -5.215648 2210.311 0 2322

Mean Std. Dev. Skewness Kurtosis Excess Kurtosis Maximum Minimum Jarque-Bera Probability Observations

c. From the results presented in table above, mean log returns on all the exchange pairs look very close to zero and the standard deviation is not so clear to tell if they are statistically different from zero. Trying a t-statistic for their significance, we have the table below;
LPC_CAD LPC_EURO LPC_POUND -0.55915799 0.809820758 -0.448354385 -4.70245064 2.478967502 -7.772197453 81.19777761 27.63470497 69.5399634 LPC_YEN -0.15875122 -13.2011074 45.1225181

t-statistic (mean) t-statistic (skewness) t-statistic (excess kurtosis)

The mean log returns is statistically proven to be zero for all currencies which means they did not change much over the period probably only gained value marginally. Except from the US dollar pair with euro, all other distributions are significantly skewed to the left. Also, they all have fat tail with the CAD pair showing stronger indication of volatility.

d. Density plot for daily log returns dollar to euro