Suppose you are estimating an equation to predict daily changes in the Dow Jones Industrial Average over the past 5 years (so you have 1250 observations.) In addition to a bunch of other explanatory variables, you decided to include a dummy variable (ODDDAY = 1 on an odd numbered day (i.e. the 25^th of the month, as opposed to the 26^th); zero otherwise) to capture whether or not the day was odd numbered. Your hypothesis is that people psychologically prefer even numbers, so the DJIA should move higher on even number days and lower on odd number days.
Your results look like this $\hat { Y }$ = -12.87 + ……. - 7.92 ODDDAY
(-4.65) (-2.1)
(where …… represents results on all the rest of the X variables and t-statistics are in parentheses)
A) The results shown can be taken to mean that you were right: the negative feelingsabout odd days cause people to react negatively in the stock market, and those negative odd-day feelings cause the DJIA fall. True, false, or uncertain? Explain.
B) What would be a good guess for the value of the p-value on the coefficient attached to ODDDAY? Explain.
C) When you drop ODDDAY from the model R² decreases a small amount; adjusted R² decreases a small amount; and the Akaike Information Criterion falls a small amount. Explain what these three changes imply about whether ODDDAY belongs in the model or not.
D) A classmate says your model must be bad because the estimated intercept coefficient of
-12.87 makes no sense-the DJIA cannot be negative. How do you respond?

Question

Suppose you are estimating an equation to predict daily changes in the Dow Jones Industrial Average over the past 5 years (so you have 1250 observations.) In addition to a bunch of other explanatory variables, you decided to include a dummy variable (ODDDAY = 1 on an odd numbered day (i.e. the 25^th of the month, as opposed to the 26^th); zero otherwise) to capture whether or not the day was odd numbered. Your hypothesis is that people psychologically prefer even numbers, so the DJIA should move higher on even number days and lower on odd number days.
Your results look like this

\hat { Y }

= -12.87 + ……. - 7.92 ODDDAY
(-4.65) (-2.1)
(where …… represents results on all the rest of the X variables and t-statistics are in parentheses)
A) The results shown can be taken to mean that you were right: the negative feelingsabout odd days cause people to react negatively in the stock market, and those negative odd-day feelings cause the DJIA fall. True, false, or uncertain? Explain.
B) What would be a good guess for the value of the p-value on the coefficient attached to ODDDAY? Explain.
C) When you drop ODDDAY from the model R² decreases a small amount; adjusted R² decreases a small amount; and the Akaike Information Criterion falls a small amount. Explain what these three changes imply about whether ODDDAY belongs in the model or not.
D) A classmate says your model must be bad because the estimated intercept coefficient of
-12.87 makes no sense-the DJIA cannot be negative. How do you respond?

Quizplus · Accepted Answer

The Answer of Suppose you are estimating an equation to predict daily changes in the Dow Jones Industrial Average over the past 5 years (so you have 1250 observations.) In addition to a bunch of other explanatory variables, you decided to include a dummy variable (ODDDAY = 1 on an odd numbered day (i.e. the 25^th of the month, as opposed to the 26^th); zero otherwise) to capture whether or not the day was odd numbered. Your hypothesis is that people psychologically prefer even numbers, so the DJIA should move higher on even number days and lower on odd number days. Your results look like this $\hat { Y }$ = -12.87 + ……. - 7.92 ODDDAY (-4.65) (-2.1) (where …… represents results on all the rest of the X variables and t-statistics are in parentheses) A) The results shown can be taken to mean that you were right: the negative feelingsabout odd days cause people to react negatively in the stock market, and those negative odd-day feelings cause the DJIA fall. True, false, or uncertain? Explain. B) What would be a good guess for the value of the p-value on the coefficient attached to ODDDAY? Explain. C) When you drop ODDDAY from the model R² decreases a small amount; adjusted R² decreases a small amount; and the Akaike Information Criterion falls a small amount. Explain what these three changes imply about whether ODDDAY belongs in the model or not. D) A classmate says your model must be bad because the estimated intercept coefficient of -12.87 makes no sense-the DJIA cannot be negative. How do you respond?

Suppose You Are Estimating an Equation to Predict Daily Changes Y^\hat { Y }Y^

Suppose You Are Estimating an Equation to Predict Daily Changes $\hat { Y }$