Reference no: EM131058078 , Length:
The data set Fbylds.txt contains observations on the monthly Fama-Bliss bond yields with maturities 1 and 3 years obtained from CRSP. Let y1t and y3t denote the yields with maturities 1 and 3 years respectively.
qdate = date YYYYMMDD
yield1 = bond yield with 1 year maturity
yield3 = bond yield with 3 year maturity
Instructions:
(1) To upload the data set into R, use read. table 0.
(2) For your answers, hand in only the print of the script for your R commands along with your explanations.
Questions:
(1) Fit the linear regression model
Y3t = β0 + β1γlt + et.
Write down the fitted model. What is the R2? Is the model adequate? Why?
(2) Let dlt = (1 - B)ylt and d2t = (1 - B)y3t, where B is the back-shift operator and dit is the change in monthly bond yields. Consider the linear regression model
d3t = β0 + β1dlt + et
Write down the fitted model. What is the R2? Explain why it is appropriate to take the first difference of the bond yields.
(3) Is the model in part (2) adequate? If not, modify the model and write down the new model.
(4) Based on the modified model, describe the linear dependence between the bond yields.
(5) Suppose that you are concerned with taking the first difference. Fit the AR(6) model to y3t using y1t as an explanatory variable along with an intercept. Write down the down the fitted model.
(6) Modify the model by letting insignificant coefficients of lags 2 and 5 be zero. Write down the fitted model.
Is the modified model adequate? Why?
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