Question: (i) In Example 11.4, it may be that the expected value of the return at time t, given past returns, is a quadratic function of

(i) In Example 11.4, it may be that the expected value of the return at time t, given past returns, is a quadratic function of returnt-1. To check this possibility, use the data in NYSE.RAW to estimate
return, = (0 + (1 returnt-1 + (2 return2t-1 + u,;
report the results in standard form.
(ii) State and test the null hypothesis that E(returnt|returnt-1) does not depend on return, v (There are two restrictions to test here.) What do you conclude?
(iii) Drop return2t-1 from the model, but add the interaction term returnt-1 ( returnt-2. Now test the efficient markets hypothesis.
(iv) What do you conclude about predicting weekly stock returns based on past stock returns?

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i ii iii The estimated equation is return 226 049 return 0097 return 087 039 00... View full answer

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