Course: Basic Econometrics

Assignment

Question number: 1, 2, 3, 4

Student number: 1004993

Programme: MSc. in Financial Forecasting and Investment

02 December, 2010

UNIVERSITY OF GLASGOW
Business School
 Department of Economics

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2
1. (i) Nominal Stock Returns (NSR):

To calculate the Nominal Stock Returns (NSR) of Alleghany Corporation, the below
mentioned formula is used as the data that has been used is in time series data on monthly
basis for the period of January 1980 to December 2009.

is the nominal stock price at time t, and is the nominal stock price at time t-1. It is
mentionable that without the data of previous month of January 1980, it is not possible to
generate the data for February 1980 as NSR shows the change between the two months. To
generate the nominal stock returns (NSR) with time series data, we have used MICROFIT
software. The formulas which have been used in generating the data are as follows:
LS = LOG (S)
DLS = LS – LS (-1)
NSR = DLS * 100

1. (ii) Growth Rate of Industrial Production (GIND):

To generate the growth rate of industrial production (GIND) of Alleghany Corporation, time
series data of level of industrial production (IP) on monthly basis for the period of 1980 to
December 2009 is used. To calculate the series the following formula has been used.

It should be stated that it wasn’t possible to figure out the data for GINP for January 1980 for
the same reason that has been discussed for the previous case. To generate the GIND series of
data, we have used MICROFIT software. The formulas which have been used in generating
the data are as below:
LIP = LOG (IP)
DLIP = LIP – LIP (-1)
GNIP = DLIP * 100

The sample data result for generating NSR and GIND are showed in table 1.

[ Table 1 ]

3
2. Properties of Dataset:

Table 2 represents the statistical measures of monthly nominal stock price (S) of Alleghany
Corporation, nominal short-term interest which is measured by the effective federal funds
rate (FED), the level of industrial production of U.S. (IP), nominal stock return (NSR) and
growth rate of industrial production (GIND) for twenty seven years starting from the year of
1980. Table 3 demonstrates the correlation between the independent and dependant variables
of the models.

[ Table 2]

Graph 1 illustrates the increasing or decreasing pattern of monthly nominal stock price (S) of
Alleghany Corporation, nominal short-term interest (FED), the level of industrial production
of U.S. (IP), nominal stock return (NSR) and growth rate of industrial production (GIND) for
the above mentioned periods.

 Location:

Minimum, maximum, mean and median are the statistical measures which are used to know
the location of the given dataset of Alleghany Corporation.

 Minimum and Maximum:

Minimum value of nominal stock price (S) of Alleghany Corporation for the period of
February 1880 to December 2009 is 4.8 where as the maximum value of S is 392.19. During
the same period, the maximum growth rate of industrial production (GNIP) is 2.1227%

For the period of February 1880 to December 2009, the maximum of nominal stock returns
(NSR) is 32.1244%.

 Mean and Median:

For time series data mean or average do not affect that much in analyzing data. However,
mean of nominal stock price (S) of Alleghany Corporation is 112.90 during the period of
February 1880 to December 2009. After analyzing the dataset, we see that in the very
beginning of the sample period the nominal stock price is very lower than of mean. However,
from the Graph 1, we can say that the nominal stock price tends to increase more on monthly
basis though there is some huge fluctuation in few periods. This fluctuation may arise from

4
economical issues which will be discussed later in this report. Although short term interest
rate is one of the vital issues for this case, still the mean of short term interest rate of 6% do
not imply any consequences for this case.

[ Graph 1,2,3]

The monthly average nominal stock return (NSR) for the Alleghany Corporation is 1.02%.
As the mean is influenced by outliers like maximum and minimum values of NSR, it can be
said that this is not a robust statistical measure. On the other hand, median of NSR is 0.98%
which is less than mean, can reduce the importance to be attached with the outliers.

[ Graph 4]

The median of growth rate of industrial production is 0.209864% whereas the mean of GINP
is 0.1560% which is pretty closer to median. Although, the average growth rate is positive, it
is not as higher as it should have been.

[ Graph 5]

 Dispersion:

Range, standard deviation, coefficient of variation and standard error are used to measure the
dispersion of the sample.

 Range:

From the table: we can see that the range of S, FED, IP, NSR and GINP are 387.39, 18.98%,
54.1, 0.7724% and 0.0613% respectively. These values can be misleading as the maximum or
minimum values of the variables are turned out to be rare. Thus it does not represent the
entire distribution.

 Standard Deviation:

Standard deviation of nominal short term interest rates is 3.7714 shows that the dispersion
from the average is quite low which indicates that the data points tend to be very close to the
mean. As the standard deviation of the FED is quite low, we can say that the rate is not
volatile. From the graph 2, it can be seen that the nominal interest rates is fall as time passes

5
though there is high and low fluctuation in few periods. However, these fluctuations are not
very high.

From the standard deviation of nominal stock returns we can analyze that return on the fund
hasn’t deviated that much that of the expected normal returns. Similarly, standard deviation
of GIND is 0.0071 interprets that though there is positive growth change, it hasn’t affected
the return that much.

 Coefficient of Variation:

Nominal short term interest rates’ coefficient of variation of 0.6286 is comparatively lower
than of nominal stock returns of 5.8695. As the FED’s coefficient of variation is higher, it
represents that the risk-return trade off is not better. The higher the coefficient of variation,
the higher is the residuals to the predictive of value of the model and lower the coefficient of
variation the lower is the dispersion. Likewise, the coefficient of GIND is 4.5211.

 Standard Error:

The standard error of nominal stock returns is 0.0032 shows that the sample mean has
deviated 0.3167% from the actual mean of the population. We know that standard error is
inversely proportional to the sample size. As the standard error is smaller; we can say that the
statistic has approached near to actual value due to large sample size.

The standard error of the growth rate of industrial production is 0.0004 represents that the
deviation between sample mean and actual mean of the population is only 0.0372. As the
standard error is so small, it shows more representative sample size.

 Shape:

In order to know the shape of the curves following statistical measures are used:

 Sample Variance:

One of the major dispersion measures is sample variance as it shows a set of data points
around their mean value. The variance of nominal short term interest rate, 14.2236 presents
the volatility of FED. Nominal stock return’s variance is 36.0212 which is quite volatile. On
the other hand the variance for GIND is 0.4971 which indicates the volatility of the GIND is
very lower compared to NSR.

6
 Kurtosis:

The kurtosis measure is used to describe the distribution of observed data around the mean
which shows the volatility of volatility. The kurtosis of nominal stock price is very low that is
-0.206182.

If the kurtosis of FED is observed, it can be noticed that it is also quite low and is only
1.6965. Thus, it portrays a chart with skinny tails and a distribution concentrated toward the
mean. Hence, in the figure 1, it can be seen that the shape tends to have a flat top near the
mean rather than a sharp peak.

[ Figure 1]

On the other hand, the kurtosis of nominal stock returns shows a quite higher kurtosis than of
FED. Thus, it tends to have a distinct peak near the mean, decline rather rapidly and have
heavy tails. The histogram showed in figure 2 exhibits the same as discussed.

[ Figure 2]

The kurtosis of industrial production is -1.5170. However, contrary to IP kurtosis the kurtosis
of growth rate of industrial production is higher that is 4.2214.

[ Figure 3]

 Skewness:

Skewness is used as a dispersion measure as statistical measure for this case as it describes
asymmetry from the probability distribution of a real valued random variable. The skewness
of FED is 1.0789 that shows a positive value. Hence, it indicates that the tail on right side is
lower than the left side and the bulk of the values lie to the left of the mean. Nominal stock
return’s skewness is -1.1232 which is negative and interprets that the tail on the left side of
the probability density function is longer than the right side and the bulk of the values lie to
the right of the mean. Likewise, the skewness for GIND is -0.935714 which shows negative
value.

7
Correlation between the Variables:

Table 3 shows the correlation between nominal stock price, nominal short term interest rate,
industrial production, nominal stock returns and growth rate of industrial production.
Correlation between nominal stock returns and FED is 0.0230, shows positive relationship.
Thus it can be interpreted as that both the variables move to the same direction. Similarly, the
correlation between NSR and GIND is 0.1082. This positive relation also implies that both
the variables move to same direction. However for both of the correlation, the relationship is
not very strong as both of the values are far from 1.

[Table 3]

Preliminary Analysis of Data:

Before OLS regression analysis, it is important to have preliminary analysis of the dataset.
Thus, to know the best fit for NSR and FED a scattered plot with the best possible regression
line has been created and is showed in graph 6.

[ Graph 6]

3. (i) Using the Ordinary Least Squares (OLS), we can estimate the below mentioned
regression model.

Model 1

In the regression model, nominal stock return (NSR) is dependent variable and nominal short-
term interest rate, measured by effective federal funds rate (FED) is independent variable. To
generate the result using OLS method, MICROFIT software has been used.

[ Figure: 4]

After running the regression, the following nominal stock returns equation is found:

From the equation it can be interpreted that over the monthly period February 1980 to
December 2009, there is positive relationship between nominal stock returns (NSR) and
nominal short term interest rate (FED) as the slope coefficient ( is positive. It interprets

8
that if the nominal short term interest rate goes up by 1%, on average, nominal stock returns
increases by about 0.0366%. Moreover, the value of constant ( indicates that if nominal
short term interest rate is zero, the average nominal stock returns will be about 0.8029%.

From the figure 4, it can be observed that the R2 value is 0.0005290 which is very low and
interprets that only 0.0529% of the variation of nominal stock returns can be explained by
nominal short term interest rate.

3 (ii) To determine whether the estimated slope coefficient ( is significantly

different from zero at the 5% level of significance either through confidence interval
approach or t-test approach, the following hypothesis has been tested at the earlier mentioned
significance level.

Null Hypothesis, : =0

Alternative Hypothesis, : ≠0

From table 1.1, the following data can be observed:

Slope coefficient of FED, = 0.0366

Standard error of FED, =0.0842

Degrees of freedom, df = n-k = 359-2 = 357

Level of Significance, α = 5 %

 Confidence Interval Approach:

The confidence interval for 2 can be measured as follows:

2 tα/2
From the t-table (Appendix D, table D.2, Gujarati) it can be found that for 357 degrees of
freedom: tα/2 = t0.05/2 = 1.960. Hence, we can attain the outcome by substituting all the known
values that the 100(1- α) % or 95% confidence interval for 2 is:

2 tα/2 = 0.0366 1.960 (0.0842)

= [ -0.1284, 0.2016 ]

9
Given the confidence coefficient of 95%, in the long run, intervals like (-0.1284, 0.2016)
contains the true value of since 2 under the null hypothesis is zero and it lies within the
confidence interval, we do not reject the null hypothesis at the 5% level of significance.
Therefore, 2 is not statistically different from zero and the finding is not statistically
significant.

 t-test Approach:

The t- statistic value can be obtained from figure 4. The following equation also be used to
calculate the t-statistic:

t-statistic, t =

= 0.4347
Critical t- value, = tn-k,α/2

= t357, 0.05/2
=1.960
As, |t| = 0. 4347 < tn-k,α/2 = 1.960, we do not reject the null at the 5% level of significance.
Thus 2 is not statistically different from zero.

Using both the confidence interval approach and t-test approach to test whether the estimate
for 2 is significantly different from zero at the 5% level of significance, same result has been
achieved that is 2 is not statistically different from zero.

3 (iii) As shown in Figure 5, during the period of February 1980 to July 2007, the
constant coefficient ( ) is 1.3900 and slope coefficient of FED ( ) is -0.0253.

[ Figure 5 ]

The value of constant indicates that the average value of nominal stock returns is about
1.3900% when the nominal short term interest rate is zero. Moreover, the coefficient of FED
is negative which interprets that when the nominal short term returns increases, the stock
returns decreases, which seem to be a normal phenomenon. When short term interest rate
increases people tend to invest in FED as its risk free. Hence, if nothing else changes, the
stock price tend to drop as the required return is higher. Thus, during the period of February
1980 to July 2007, growth of 1% in FED creates a drop of 0.0253% in nominal stock returns.

10
 [ Graph 7, 8 ]

For the period of August 2007 to December 2009, using OLS method it can be seen in the
figure 6 that the constant value coefficient ( ) is -0.9014 and slope coefficient of FED ( ) is
-0.2504.

[ Figure 6 ]

can be interpreted as like that if the nominal short term interest rate is zero, nominal stock
returns is -0.9014%. So, it shows that if FED is zero, nominal stock return will be negative.
The slope coefficient of FED for this sub sample model indicates that similar relationship like
previous sub sample model. It indicates 1% increase in FED influences nominal stock returns
to decrease by 0.2504%.

[ Table 4 ]

The correlation between NSR and FED for the period of February 1980- July 2007 is -0.0159
which also indicates that there is negative relationship between NSR and FED. However, the
relationship is not perfectly correlated as it varies from -1. However, when the graph is
observed for the mentioned period it’s been seen that the relationship between the NSR and
FED is not exact as at several points NSR and FED haven’t shown negative relationship.
Moreover, the correlation between NSR and FED during the period of August 2007-
December 2009 is - 0.06057. Likewise the other sub period model, NSR and FED has negative
relationship.

Here, p-value is being used to know whether the null hypothesis would be rejected. If the p-
value associated with the estimate of is evaluated, it can be noticed that p-value is 0.774
which is higher than 0.05 that is level of significance. The higher the p-value, the stronger the
evidence is in favour of the null hypothesis. Thus for the model 1, we do not reject the null at
the 5% level of significance.

If the p-value related with is considered, it can be observed that p-value is 0.755 which is
higher than 0.05 (level of significance). Similarly, for this sub period model, we do not reject
the null at the 5% level of significance.

The R2 of 0.0002519 for the first sub period model indicates that only 0.0252% of the
variation of NSR can be explained by FED. On the other hand, the R2 of 0.0037 for the

11
second sub period model, it interprets as only 0.37% of the variation of the NSR can be
explained by FED. Thus, it can be said that both the model do not have best fitness as the R2
is very lower.

From the above mentioned analysis, it can be said that the recent financial crisis hasn’t
affected that much into the relationship between stock returns and interest rates of Alleghany
Corporation though from their last few years annual report, they have used the recession
period as one of the key indicator for risk in their Financial Report of recent few years.

4. (i) Using the Ordinary Least Squares (OLS), we can estimate the below mentioned
regression model.

NSRt = ß1 + ß2 FED t + ß3 GINDt + μt Model 2

In the regression model, nominal stock returns (NSR) is dependent variable and nominal
short-term interest rate, measured by effective federal funds rate (FED) and growth rate of
industrial production (GIND) are the independent variables. To generate the result using OLS
method, MICROFIT software has been used.

[ Figure: 7]

After running the regression, the following nominal stock returns equation is found:

From the equation it can be interpreted that over the monthly period February 1980 to
December 2009, there is positive relationship between nominal stock returns (NSR) and
nominal short term interest rate (FED) and growth rate of industrial production as the slope
coefficients (ß2,ß3) are positive. The intercept (ß1) of 0.5654 shows that if nominal short term
interest rate and growth rate of industrial product is kept zero, the average nominal stock is
about 0.5654 %. The slope coefficient of FED (ß2) of 0.0516 interprets that if the intercept
and the other slope coefficient is kept zero, a growth of 1% in FED increases the nominal
stock returns by about 0.0516%. Likewise, the slope coefficient of GIND (ß3) of 0.9447
indicates an increase in growth rate of industrial production by 1% increases the nominal
stock returns by 0.9447% while FED and intercept is zero.

12
In order to know the fit of the models mentioned earlier, R2 value is used. In model 1, R2 is
0.0005290. It shows that 0.0529% of the variation of nominal stock returns can be explained
by independent variable of FED.

On the other hand in model 2, R2, 0.012758 shows a better position than of model 2 as the R2
is higher in model 2. It interprets that about 1.2758 % of the variation of nominal stock
returns can be explained by the control variables, nominal short term interest rate and growth
rate of industrial production. As the model 2’s R2 is closer to 1, it can be said that

4 (ii) In order to test joint hypothesis, F-statistic is being used and the following
hypothesis has been considered at α = 5%.

Null Hypothesis, :

Alternative Hypothesis, : Not all slope coefficients are simultaneously zero

Figure 7 shows that the value of the F-statistic is 2.3003 for model 2. To know the critical F-
value, (Appendix D, table D.3, Gujarati) is used.

Critical F- value, = F α (k-1, n-k)

= F 0.05(3-1,359-3)

= F 0.05(2,356)
= 3.00
As F-statistic (2.3003) < F-critical (3.00), we do not reject null hypothesis at 5% level of
significance.

Comments:

If any of the dependent or independent variables data is non-stationary for the provided
dataset of Alleghany Corporation, then the results may not be valid at all. If both are non-
stationary, then sometimes the result may be valid (when they are co-integrated), and other
times the result will not be valid. Thus, it’s been assumed that the data is stationary. As the
dataset is time series data autoregressive or moving average nature of the errors should have
been considered. However, it should be considered as a limitation of the report.

13
 Tables, Graphs and Figures
Table 1: Generating Data of NSR and GIND

Interest Rate, measured

Nominal Stock Price of

Industrial Production,
Nominal Short Term

DLIP=LIP-LIP(-1)
Alleghany Corp, S

GIND=DLIP*100
DLS=LS-LS(-1)

NSR=DLS*100
LIP=LOG(IP)
by FED, FED

LS=LOG(S)
Date

IP

31-Jan-80 6.75 13.82 51.7 1.9095 3.9455 *NONE* *NONE* *NONE* *NONE*

29-Feb-80 6.68 14.13 51.5 1.8991 3.9416 -0.0104 -0.0039 -1.0425 -0.3876
31-Mar-80 5.51 17.19 50.5 1.7066 3.9220 -0.1926 -0.0196 -19.2553 -1.9608
30-Apr-80 4.8 17.61 49.2 1.5686 3.8959 -0.1379 -0.0261 -13.7949 -2.6080
30-May-80 5.04 10.98 48.6 1.6174 3.8836 0.0488 -0.0123 4.8790 -1.2270
30-Jun-80 5.97 9.47 48.3 1.7867 3.8774 0.1693 -0.0062 16.9341 -0.6192
31-Jul-80 6.39 9.03 48.5 1.8547 3.8816 0.0680 0.0041 6.7987 0.4132
29-Aug-80 6.49 9.61 49.2 1.8703 3.8959 0.0155 0.0143 1.5528 1.4330

Table 2: Statistical Measures of Dataset, February 1980- December 2009

Sample Period February 1980 to December 2009

Nominal Level of Nominal Growth Rate
Nominal Stock Short-term Industrial Stock of Industrial
Variables
Price (S) Interest Rate Production Returns Production
(FED) (IP) (NSR) (GIND)

Minimum 4.800000 0.120000 46.600000 -45.110111 -4.004750

Location

Maximum 392.190000 19.100000 100.700000 32.124404 2.122721

Mean 112.901365 6.000084 73.169638 1.022536 0.155959

Median 68.260000 5.490000 70.900000 0.980157 0.209864

Range 387.390000 18.980000 54.100000 77.234515 6.127471

Dispersion

Standard Deviation 102.012220 3.771415 17.120715 6.001772 0.705099

Coefficient of
0.903550 0.628560 0.233990 5.869500 4.521100
variation
Standard Error 5.383999 0.199048 0.903597 0.316761 0.037214

Sample Variance 10406.492967 14.223572 293.118880 36.021269 0.497164

Shape

Kurtosis -0.206182 1.696520 -1.517082 12.570468 4.221496

Skewness 0.911173 1.078916 0.071637 -1.123147 -0.935714

14
Table 3: Correlation between the Variables, February 1980- December 2009

S FED IP NSR GIND

S 1.0000 -0.6252 0.9234 -0.0458 -0.0916

FED -0.6252 1.0000 -0.7081 0.0230 -0.0851

IP 0.9234 -0.7081 1.0000 -0.0692 -0.0347

NSR -0.0458 0.0230 -0.0692 1.0000 0.1082

GIND -0.0916 -0.0851 -0.0347 0.1082 1.0000

Table 4: Correlation between NSR and FED

Period of February 1980- July 2007 -0.01587

Period of August 2007- December 2009 -0.06057

15
Graph 1: Changes in Stock Price of Alleghany Corporation (S), February 1980-
December 2009

450

400
350

300
Price in Dollars

250
200
150
100

50
0

Month

Graph 2: Changes in Nominal Short-term Interest Rate, Measured by Effective Federal

Fund Rate (FED), February 1980- December 2009

25

20
Rates in Percentage

15

10

Date

16
Graph 3: Changes in Level of Industrial Production (IP), February 1980- December
2009

120

100

80
Unit

60

40

20

Month

Graph 4: Changes in Nominal Stock Returns, February 1980- December 2009

40.00

30.00

20.00
Rates in Percentage

10.00

0.00

-10.00

-20.00

-30.00

-40.00

-50.00

Month

17
Graph 5: Changes in Growth Rate of Industrial Production, February 1980- December
2009

3.00

2.00

1.00
Rates in Percentage

0.00

-1.00

-2.00

-3.00

-4.00

-5.00

Months

Graph 6: Pre Analysis of Dataset

18
Graph 7: Relationship between Nominal Short Term Interest Rate (FED) and Nominal
Stock Returns (NSR), February 1980- July 2007

40

30

20

10
Rates in Percentage

-10

-20

-30

-40

-50

Month
FED NSR

Graph 8: Relationship between Nominal Short Term Interest Rate (FED) and Nominal
Stock Returns (NSR), August 2007- December 2009

20
15
10
Rates in Percentage

5
0
-5
-10
-15
-20
-25

Month

FED NSR

19
Figure 1: Histogram of Nominal Short Term Interest Rate (FED)

Figure 2: Histogram of Nominal Stock Return (NSR)

Figure 3: Histogram of Growth Rate of Industrial Production (GIND)

20
Figure 4: OLS Estimation Output of Model 1 from MICROFIT, February 1980-
December 2009

Ordinary Least Squares Estimation

*************************************************************************
Dependent variable is NSR
359 observations used for estimation from 1980M2 to 2009M12
*************************************************************************
Regressor Coefficient Standard Error T-Ratio[Prob]
CON .80292 .59650 1.3460[.179]
FED .036602 .084203 .43469[.664]
*************************************************************************
R-Squared .5290E-3 R-Bar-Squared -.0022706
S.E. of Regression 6.0086 F-stat. F(1, 357) .18896[.664]
Mean of Dependent Variable 1.0225 S.D. of Dependent Variable 6.0018
Residual Sum of Squares 12888.8 Equation Log-likelihood -1152.2
Akaike Info. Criterion -1154.2 Schwarz Bayesian Criterion -1158.0
DW-statistic 1.8629
*************************************************************************

Diagnostic Tests
*************************************************************************
* Test Statistics * LM Version * F Version *
*************************************************************************
* * * *
* A:Serial Correlation * CHSQ (12) = 21.6980 [.041] * F (12, 345) = 1.8494 [.040]*
* * * *
* B:Functional Form * CHSQ ( 1) = 4.1061 [.043] * F (1, 356) = 4.1189 [.043]*
* * * *
* C:Normality * CHSQ ( 2) = 2370.6 [.000] * Not applicable *
* * * *
* D:Heteroscedasticity * CHSQ ( 1) = 4.6779 [.031] * F (1, 357) = 4.7133 [.031]*
*************************************************************************
A:Lagrange multiplier test of residual serial correlation
B:Ramsey's RESET test using the square of the fitted values
C:Based on a test of skewness and kurtosis of residuals
D:Based on the regression of squared residuals on squared fitted values

21
Figure 5: OLS Estimation Output for sub period of Model 1 from MICROFIT,
February 1980- July 2007

Ordinary Least Squares Estimation

*************************************************************************
Dependent variable is NSR
330 observations used for estimation from February 1980 to July 2007
*************************************************************************
Regressor Coefficient Standard Error T-Ratio[Prob]
CON 1.3900 .64804 2.1450[.033]
FED -.025330 .088116 -.28747[.774]
*************************************************************************
R-Squared .2519E-3 R-Bar-Squared -.0027961
S.E. of Regression 5.8548 F-stat. F(1, 328) .082637[.774]
Mean of Dependent Variable 1.2284 S.D. of Dependent Variable 5.8466
Residual Sum of Squares 11243.4 Equation Log-likelihood -1050.4
Akaike Info. Criterion -1052.4 Schwarz Bayesian Criterion -1056.2
DW-statistic 1.8408
*************************************************************************

Diagnostic Tests
*************************************************************************
* Test Statistics * LM Version * F Version *
*************************************************************************
* * * *
* A:Serial Correlation * CHSQ (12) = 20.3167 [.061] * F (12, 316) = 1.7276 [.060]*
* * * *
* B:Functional Form * CHSQ ( 1) = 2.4985 [.114] * F ( 1, 327) = 2.4947 [.115]*
* * * *
* C:Normality * CHSQ ( 2) = 2968.2 [.000] * Not applicable *
* * * *
* D:Heteroscedasticity * CHSQ ( 1) = 6.4078 [.011] * F ( 1, 328) = 6.4950 [.011]*
*************************************************************************
A:Lagrange multiplier test of residual serial correlation
B:Ramsey's RESET test using the square of the fitted values
C:Based on a test of skewness and kurtosis of residuals
D:Based on the regression of squared residuals on squared fitted values

22
Figure 6: OLS Estimation Output for sub period of Model 1 from MICROFIT, August
2007- December 2009

Ordinary Least Squares Estimation

*************************************************************************
Dependent variable is NSR
29 observations used for estimation from August 2007 to December
2009
*************************************************************************
Regressor Coefficient Standard Error T-Ratio[Prob]
CON -.90141 1.9086 -.47228[.641]
FED -.25039 .79411 -.31531[.755]
*************************************************************************
R-Squared .0036688 R-Bar-Squared -.033232
S.E. of Regression 7.3806 F-stat. F (1, 27) .099423 [.755]
Mean of Dependent Variable -1.3203 S.D. of Dependent Variable 7.2609
Residual Sum of Squares 1470.8 Equation Log-likelihood -98.0799
Akaike Info. Criterion -100.0799 Schwarz Bayesian Criterion -101.4471
DW-statistic 2.2076
*************************************************************************

Diagnostic Tests
*************************************************************************
* Test Statistics * LM Version * F Version *
*************************************************************************
* * * *
* A:Serial Correlation * CHSQ (12) = 11.8369 [.459] * F (12,15) = .86209 [.597]*
* * * *
* B:Functional Form * CHSQ ( 1) = .61686 [.432] * F (1, 26) = .56506 [.459]*
* * * *
* C:Normality * CHSQ ( 2) = 6.7708 [.034] * Not applicable *
* * * *
* D:Heteroscedasticity * CHSQ ( 1) = .93275 [.334] * F (1, 27) = .89728 [.352]*
*************************************************************************
A:Lagrange multiplier test of residual serial correlation
B:Ramsey's RESET test using the square of the fitted values
C:Based on a test of skewness and kurtosis of residuals
D:Based on the regression of squared residuals on squared fitted values

23
Figure 7: OLS Estimation Output of Model 1 from MICROFIT, February 1980- July
2007

Ordinary Least Squares Estimation

**************************************************************************
Dependent variable is NSR
359 observations used for estimation from February 1980 to December 2009
**************************************************************************
Regressor Coefficient Standard Error T-Ratio[Prob]
CON .56537 .60436 .93549[.350]
FED .051637 .084109 .61393[.540]
GIND .94473 .44988 2.1000[.036]
**************************************************************************
R-Squared .012758 R-Bar-Squared .0072119
S.E. of Regression 5.9801 F-stat. F (2, 356) 2.3003[.102]
Mean of Dependent Variable 1.0225 S.D. of Dependent Variable 6.0018
Residual Sum of Squares 12731.1 Equation Log-likelihood 1149.9
Akaike Info. Criterion -1152.9 Schwarz Bayesian Criterion 1158.8
DW-statistic 1.9038
**************************************************************************

Diagnostic Tests
**************************************************************************
* Test Statistics * LM Version * F Version
*
**************************************************************************
* * * *
* A:Serial Correlation * CHSQ (12) = 22.7754 [.030] * F (12, 344) = 1.9418 [.029]*
* * * *
* B:Functional Form * CHSQ ( 1) = .40058 [.527] * F ( 1, 355) = .39655 [.529]*
* * * *
* C:Normality * CHSQ ( 2) = 2688.1 [.000] * Not applicable *
* * * *
* D:Heteroscedasticity * CHSQ ( 1) = 4.8716 [.027] * F ( 1, 357) = 4.9111 [.027]*
**************************************************************************
A:Lagrange multiplier test of residual serial correlation
B:Ramsey's RESET test using the square of the fitted values
C:Based on a test of skewness and kurtosis of residuals
D:Based on the regression of squared residuals on squared fitted values

24