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SEMINAR 3 – MN-3002 Financial Market Efficiency

1. Download the excel file from Canvas. It contains the S&P 500 prices, dividends and earnings (in real terms), the 10-year interest rates, the default spread and the term spread (term structure variables).

a. Plot the following variables: real S&P 500 prices, real earnings and real dividends on one graph;

b. Plot the real S&P 500 prices and 10-year interest rates (Treasury bill), P/E ratio, dividend yield and the two term structure variables on separate graphs. Can you identify any relationship between the variables?  

2. Test the predictive power for the S&P 500 index returns of the following variables by running separate regressions on:

a. 10-year interest rates

b. dividend yields

c. P/E ratio

d. term structure variables

Are your results in line with previous studies that did similar tests? If any, what are the main differences that you can observe?

3. The excel sheet “Q3” contains monthly betas, market capitalization and the book-to-market (BE/ME) ratio for a set of 10 companies in September 2014. The monthly returns are observed in October 2014.

a. Test whether you find evidence of “size” effect by running a regression of each firm’s returns on a constant, each firm’s beta and market capitalization.

b. Next, check whether you find evidence of “book-to-market” effect by running a regression of each firm’s returns on a constant, each firm’s beta and BE/ME ratio.

c. Finally, run a multiple regression where you include each firm’s beta, market capitalization and BE/ME ratio as the three independent variables. What results do you get and how do they compare with previous studies such as Fama and French (1992)?