A researcher is attempting to form an econometric model to explain daily movements of stock returns. A colleague suggests that she might want to see whether her data are influenced by daily seasonality.

(a) How might she go about doing this?

(b) The researcher estimates a model with the dependent variable as the daily returns on a given share traded on the London stock exchange, and various macroeconomic variables and accounting ratios as independent variables. She attempts to estimate this model, together with five daily dummy variables (one for each day of the week), and a constant term, using EViews. EViews then tells her that it cannot estimate the parameters of the model. Explain what has probably happened, and how she can fix it.

(c) A colleague estimates instead the following model for asset returns, rt is as follows (with standard errors in parentheses)
ˆrt = 0.0034 − 0.0183D1t + 0.0155D2t − 0.0007D3t (0.0146) (0.0068) (0.0231) (0.0179)
−0.0272D4t + other variables (0.0193) (9.34)
The model is estimated using 500 observations. Is there significant evidence of any ‘day-of-the-week effects’ after allowing for the effects of the other variables?

(d) Distinguish between intercept dummy variables and slope dummy variables, giving an example of each.

(e) A financial researcher suggests that many investors rebalance their portfolios at the end of each financial year to realise losses and consequently reduce their tax liabilities. Develop a procedure to test whether this behaviour might have an effect on equity returns.AppendixLO1