Using the annual data on gold prices, the Consumer Price Index (CPI), and the Ne

Question

Using the annual data on gold prices, the Consumer Price Index (CPI), and the New York Stock Exchange (NYSE) Index for the United States over the period 1977-1991 we have test two regressions suggesting whether gold and stocks are a good against inflation, and the results are given below: 5+10 3. hedge Regression 1: Gold price Bi+p2CPletu Regression 2: NYSE Index1-pl+2CPIctut Explain economic theory underlying the regression equations. The relationship between gold prices and consumer prices as well NYSE and consumer prices, as represented by the equations above, is tested by using regression analysis and the results obtained are given below. Interpret these regression results and explain whether gold or stock is better hedge against inflation. a. b. Ps .-101.90 + 2.13 se (23.78) (0.230) R"=0.87 F= 85.32 N=15 =186 . 18 + 1.84 P,c se (125.40) (1.22) R:= 0.15 F= 2.30 N=15

Explanation / Answer

Consumer Price Index (CPI) is a statistical index, basically we use it to measure the change in the overall level.

As we know that as price increases => the real value of money decreases, so, an inflation hedge is an investment intended to protect the investor against a decrease in the real value of money. So, here to check whether “Gold Price” or “Stock” is a good hedge against “inflation” we are going to fit 2 different regression model.

So, in the 1st model we are judging the relationship between “Gold Price” and “CPI”, in the 2nd model we will judge the relationship between “NYSE Index” and “CPI”. Here we will judge whether “CPI” is significantly related to “Gold Price” or “NYSE Index”, if related then how much “CPI” will influence the dependent variable, which model is comparative better one.

b).

Now, consider the 1st model, Pg = 186.18 + 1.84*Pc.

So, according to the model there are positive relationship between “Pc” and “Pg”, if “Pc” will increase by “1unit”, then “Pg” will increase by “1.84” unit. The “t” value is “1.84/1.22 = 1.5082”, which is insignificant at 5% level of significance with (n-2) = (15-2) =13, degree of freedom. Now, the “R^2” the coefficient of determination is “0.15 = 15%”, which is quite low, => the given model is able to explain 15% variation in “Pg”, => 85% variation is remain unexplained. If we talk about the overall significance of the model then the value “F” statistics is “2.3” which is quite low => the “F” statistic is insignificant at the given level of significance.

Now, consider the 2nd model, Ps = (-101.90) + 2.13*Pc.

So, according to the model there are positive relationship between “Pc” and “Ps”, if “Pc” will increase by “1unit”, then “Ps” will increase by “2.13” units. Now the “t” value is “2.13/0.23 = 9.26”, which is significant at 5% level of significance with (n-2) = (15-2) =13, degree of freedom. Now, the “R^2” the coefficient of determination is “0.87 = 87%”, which is quite high, => the given model is able to explain 87% variation in “Ps”, => 13% variation is remain unexplained. If we talk about the overall significance of the model then the value “F” statistics is “85.32” which is quite high => the “F” statistic is significant at the given level of significance.

So, if we compare both these model then the 2nd is better one having higher value of “coefficient of determination” and individual coefficient as well as overall model is also significant. So, we can conclude that “NYSE Index” is better hedge against inflation.

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