Introductory Econometrics: A Modern Approach 6th Edition by Jeffrey M Wooldridge

Exercise 5

(i) In Example 11.4, it may be that the expected value of the return at time t, given past returns, is a quadratic function of returnt-1. To check this possibility, use the data in NYSE.RAW to estimate returnt = ?0 + ?1returnt-1 + ?2return2t-1 + ut; report the results in standard form.

(ii) State and test the null hypothesis that E(returntreturnt-1) does not depend on returnt-1. (Hint: There are two restrictions to test here.) What do you conclude?

(iii) Drop return2t-1 from the model, but add the interaction term returnt-1•returnt-2. Now test the efficient markets hypothesis.

(iv) What do you conclude about predicting weekly stock returns based on past stock returns?

Step 1 of 5

(i)

Estimating the regression model:

The result is as follows:

Note that RETURN_1= and RETURN_1_SQ=

The standard form of the regression model is as follows: