1. (a) A researcher estimates a model with the dependant variable as the daily returns on a given share traded on the Australian 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 happened, and how she can fix it. [10 marks]

(b) A financial specialist 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 regression model to test whether this behaviour might have an effect on equity returns. Interpret the regression coefficients. [10 marks]

(c) Describe the following terms as they are used in the context of Markov switching models: - The Markov property; - A transition matrix. [5+5=10 marks]

1. (a) A researcher estimates a model with the dependant variable as the daily returns on a given share traded on the Australian 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 happened, and how she can fix it.

(b) A financial specialist 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 regression model to test whether this behaviour might have an effect on equity returns. Interpret the regression coefficients.

(c) Describe the following terms as they are used in the context of Markov switching models: - The Markov property; - A transition matrix.