Download e-book for iPad: Solution Manual to the Econometrics of Financial Markets by Campbell J. Y.

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Extra resources for Solution Manual to the Econometrics of Financial Markets

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11)) and denote this portfolio op. 2). Kop are (K 1) vectors of portfolio weights. 4) p2 t p2 t 1 Cov R Kt p R 0 ]! 5) = op + Cov Rt R0Kt ]! 9) Rt = a + BRKt + t 29 30 PROBLEMS IN CHAPTER 6 where a is the (N 1) intercept vector, B is the (N K ) matrix of factor regression coe cients, and t is the time period t residual vector. 12) holds for di erent values of op it must be the case that ( ; B ) = 0, that is the factor regression coe cients for each asset, including asset a, sum to one. 11) we have a = 0, that is the regression intercept will be zero for all assets including asset a.

7) For such a parameter , the price process Pt = Ft + cDt indeed gives the same expected rate of return as the process Pt = Ft . 3 The Froot-Obstfeld bubble requires a very speci c dividend process. However, the bubble is strongly correlated with the dividend, capturing the e ect of dividend \overreaction". The bubble never bursts for a strictly positive dividend stream. 4) 2: This is negative when < . The autocorrelation of stock returns is determined by the balance of two opposing e ects. 4 35 and this creates positive autocorrelation in realized stock returns.

As PA0 PB0 in this case, the prices do not imply an arbitrage opportunity and may be consistent with the pure expectations hypothesis. 3 Let us assume the coupon payments are annual and are made at the end of the year. 1. Prices do not now imply an arbitrage opportunity. As an example, assume that all one- to eight-year zero-coupon bonds have price P8 per one dollar of their face value, and that the nine-year zero-coupon bond has price P9 . 1 We see that, under this non-stochastic term structure given by P8 and P9 , all interest rates are nonnegative and P8 P9 , so that no arbitrage opportunity exists.

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Solution Manual to the Econometrics of Financial Markets by Campbell J. Y.


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