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August 2008.
In the above graphs, it can be seen that prior to the GFC, the AUD follows a general
increasing price trend, with less/fewer fluctuations in comparison to the price of
commodities. In addition, the price of AUD peaks at a price of around $0.975 right before
the GFC. On the other hand, the price of commodities prior to the GFC experiences much
larger fluctuations, and follows a general trend of decreasing prices. Overall, since the
two prices move in opposite directions, it can be understood that the prices of the AUD
and commodities experience a negative relationship/correlation.
However, after the third quarter of 2008 (after the GFC), it can be seen that both AUD
and commodities prices experience a sharp fall; the AUD continues to drop until the end
of 2008, where it begins to bounce back and rise again, in comparison to the price of
commodities, which continues to drop until the beginning of 2009. This means that the
GFC had a direct impact on the prices of both markets; hence they experienced a positive
relationship/correlation.
Q7 (1 mark): Construct a scatterplot of AUD vs METAL and paste or copy into the
space below. Draw your guess of a least squares line for the whole dataset through
the data using a ruler and a red pen.
Q8 (1 mark): Run a regression of AUD on METAL and paste your Eviews output
below. Write out the results in the standard form:
AUD b0 b1METAL ut
AUD =
0.633837 + 0.000866
(0.031)
(0.000125)
SER= 0.072799
R2= 0.316185
Q9 (2 mark): Carefully interpret the slope and intercept coefficients and the R 2 and
SER
The slope of the regression line is the co-efficient (b1) of the independent variable,
METAL, which is 0.000866. Since the slope is a positive number, this means that there is
a positive relationship between METAL and AUD. This can be interpreted that, for every
1 unit increase in the metal price, it will appreciate the AUD by 0.000866.
The intercept for the regression line is 0.633837, which indicates that when the metal
price is $0, the price of AUD would be $0.633837. However, this interpretation of the
intercept doesnt make any sense, because it means that the intercept has a constant value
when the other variable is set to zero. Additionally, another reason why the intercept
wouldnt make sense (and should not be included in your analysis) is that the intercept
data point does not fall within your range of observed data (i.e. there is no red point on
the intercept). Hence, this means that the intercept is not economically meaningful.
The co-efficient of determination (r2) indicates how well the estimated regression line
fits the data. It measures the fraction of the variance Yi that is explained by (or predicted)
by Xi. In our case, the R2 value is 0.316185, which means that the model can only explain
(or account for) 31.6185% (or 31.62%) of the variation in the model. Since this is a
relatively low number, this means that the model is not very reliable.
The standard error of the regression line (SER) is another indicator of how well the
estimated regression line fits the data. It measures the variability of the spread or the
distribution of the error term ui, or in other words, it measures the magnitude of a typical
regression error between the estimated Y-values of the regression line and the actual Yvalues of the dataset (the vertical distances). In our case, the SER was equal to 0.072799,
which means that the typical regression error between regression line values and the
actual data values equals to 0.072799. Generally, a low standard error means that the
estimated regression line is a much more accurate and a better fit of the points on the
dataset.
Q10. (1 mark) Test the following hypotheses about the coefficient on METAL.
Clearly specify the rejection region if you are using critical values, and clearly state
your conclusions
b1 0
b1 0
(a) H0:
, H1:
, with =0.05 using the critical-value approach
b1 0
Step 1: H0:
b1 0
H1:
Step 2: The level of significance is 5%; this is a one sided right tail test
Step 3: Given b1 = 0.000125 (standard error)
Calculate test statistic
t act =
^1 1,0 ( 0.000866 )0
=
0.000125
SE ^
1
= 6.934545
b1 0
(b) H0:
b1 0
, H1:
b1 0
Step 1: H0:
b1 0
H1:
Step 2: The level of significance is 5%; this is a one sided left tail test
Step 3: Using our tact = 6.9345345
P-value {Z<tact} = (tact) = (6.9345345) 0 < 0.05
Therefore, since P-Value<5%, we reject the null hypothesis
the coefficient on metal is significant.
H0
), since
Q11. (1 mark) Using the dummy variable AUG08, formulate a regression to test that
the relationship between the AUD and commodity prices changed on 1 August 2008
with the sub-prime crisis. Do not perform the regression.
Regression Equation: AUD = bo + b1METAL + b2AUG08 + ui
AUD = 221.7973 + 51.84955AUD -104.7885AUG08
(40.37138)
(46.08711)
(9.602636)
SER= 32.35992
R2= 0.682852
Q12 (3 marks): Run the regression from the previous question using the dummy
variable AUG08. Include your eViews output. According to your regression, what is
the estimated relationship before 1 August 2008 and what is the estimated
relationship after 1 August 2008?
Dependent Variable: METAL
Method: Least Squares
Date: 05/21/14 Time: 17:51
Sample: 1/05/2007 1/09/2009
Included observations: 106
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
AUD
AUG08
221.7973
51.84955
-104.7885
40.37138
46.08711
9.602636
5.493925
1.125034
-10.91247
0.0000
0.2632
0.0000
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.682852
0.676693
32.35992
107857.9
-517.4394
110.8846
0.000000
241.7882
56.91152
9.819612
9.894992
9.850164
0.209356
where X
= METAL + AUG08
= b1 b2
Now, we substitute
AUG 08 ) = X
( METAL ) +
b0 + METAL+b 2 X 2+ui