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 returnt21. To check this possibility, use the data in NYSE to estimate returnt 5b0 1b1returnt21 1b2returnt21 2 1ut

;

report the results in standard form.

(ii) State and test the null hypothesis that E1returnt 0returnt21 2 does not depend on returnt21.

(Hint: There are two restrictions to test here.) What do you conclude?

(iii) Drop return2 t21 from the model, but add the interaction term returnt21

returnt22. 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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