Section 2 (20 points) we first estimate the non-linear model AR-c+bi DISPERSION

Question

Section 2 (20 points) we first estimate the non-linear model AR-c+bi DISPERSION 2+b2 LOG SIZE Where AR is the abnormal return of funds' holding stock in the earnings announcement date, DISPERSION is measured the level of funds' stock picking, and LOGSIZE is the natural of stock market capitalization, e is an error term. By using Eviews8, the empirical results are given as follows: Variable Coefficient Std. Error -Statistic Prob. DISPERSIONA2 LOGSIZE 0.174767 0.075654 2.310087 0.0220 68.21070 26.26439 2.597079 0.0101 -0.017789 0.007517 -2.366419 0.0190 R-squared F-statistic Prob(F-statistic) 0.040964Mean dependent var 4.036463 Durbin-Watson stat 0.019204 -0.001356 2.006614 From this table, we find (1) What is the final model? And Why? (2) Give explanations about the final model by figure. 2

Explanation / Answer

The final model is

Abnormal returns = 0.17 + 68.21 Dispersion ^ 2 -0.02 Log Size + Error term

The abnormal returns increases with the increase in funds's stock picking and decreases with the increase in the log of stock market capitalization.

2. Since the R Squared of the final model is 0.04 or around 4 per cent, and F statistic is also low, thus the variables do not fully explain the abnormal returns of fund's holding stock.

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