# [Solution]Coursework for Empirical Finance

Morgan Stanley is studying the relationship between the CEO salary and the company sales. They take a random sample of 20 CEOs of Bathwick companies…

Morgan Stanley is studying the relationship between the CEO salary and the company sales. They take a random sample of 20 CEOs of Bathwick companies and estimates the following relationship:

where  is the natural logarithm of salary and  is the natural logarithm of sales. The disturbance terms, , are assumed to be normally and independently distributed with zero mean and constant variance . The preliminary analysis of the sample data produces the following sample information:

Lower case letters indicate that the variables are measured as deviations from their respective sample means i.e  = .

Use the above sample information to answer all the following questions for Morgan Stanley. Show explicitly all calculations.

Calculate estimates, b0 and b1, for the unknown equation coefficients,  and .

[10 marks]

Write down the regression equation and interpret the estimated coefficients.

[5 marks]

Calculate the estimated standard errors of the estimated coefficients.

[5 marks]

Perform a test of the null hypothesis H0:  = 0 against the alternative hypothesis.

[5 marks]

Compute the value of R2 for the estimated regression. Briefly interpret the meaning of R2.

[5 marks]

[Total 30 marks]

Define the assumptions that need to hold for ordinary least squares estimators to be the best liner unbiased estimators (include the relevant mathematical expressions in your answer).

[10 marks]

What is the main contribution of classical linear model assumptions?

[5 marks]

[Total 15 marks]

Explain the long run propensity (LRP) in time series data (include the relevant mathematical expressions in your answer).

[5 marks]

Explain when a trend should be included in time series data analysis.

[5 marks]

What is seasonality in time series data analysis? How to deal with it?

[5 marks]

[Total 15 marks]

Q4.

Discuss the concept of market efficiency and its implications for investment managers.

[10 marks]

Discuss how you will empirically test whether a fund manager has superior investment skills.

[10 marks]

Design an empirical method to test whether the market efficiency is semi-strong form under the Efficient Markets Hypothesis.
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