Gary Martin is a research analyst at an investment firm in Chicago. He follows the oil industry and has developed a pretty sophisticated model that forecasts an oil company's stock price. However, given the recent strife in the Middle East, he wonders if simpler causal models might do a better job at predicting stock prices in the near future. He collects data on the daily adjusted closing price of ExxonMobil Corporation (XOM) as well as the Dow Jones Industrial Average (DJIA) for February 2011. A portion of the data is shown in the accompanying table.

Data for Case Study 18.3 XOM and DJIA Adjusted Closing Prices, February 2011

t................................ DJIA.......................... XOM

February 1................ 12,040.16........................... 83.47

February 2.................12,041.97........................... 82.97

⋮....................................... ⋮................................ ⋮

February 28............... 12,226.34........................... 85.53

In a report, use the sample information to:

1. Estimate three models: (a) XOMt = β0 + β1DJIAt−1 + εt, (b) XOMt = β0 + β1XOMt−1 + εt, and (c) XOMt = β0 + β1DJIAt−1 + β2XOMt−1 + εt.

2. Determine which model best fits the data.

3. Use the most appropriate model to forecast the daily stock price for March 1, 2011.