Exam (elaborations) TEST BANK FOR The Econometrics of Financial Markets By Campbell J. Y. (Solution Manual)

Exam (elaborations) TEST BANK FOR The Econometrics of Financial Markets By Campbell J. Y. (Solution Manual) A Solution Manual to The Econometrics of Financial Markets Petr Adamek John Y. Campbell Andrew W. Lo A. Craig MacKinlay Luis M. Viceira Author address: MIT Sloan School, 50 Memorial Drive, Cambridge, MA 02142{1347 Department of Economics, Harvard University, Littauer Center, Cam- bridge, MA 02138 MIT Sloan School, 50 Memorial Drive, Cambridge, MA 02142{1347 Wharton School, University of Pennsylvania, 3620 LocustWalk, Philadel- phia, PA 19104{6367 Department of Economics, Harvard University, Littauer Center, Cam- bridge, MA 02138 Contents List of Figures v List of Tables vii Preface 1 Problems in Chapter 2 3 Solution 2.1 3 Solution 2.2 3 Solution 2.3 3 Solution 2.4 3 Solution 2.5 4 Problems in Chapter 3 9 Solution 3.1 9 Solution 3.2 10 Solution 3.3 10 Solution 3.4 11 Solution 3.5 13 Solution 3.6 13 Solution 3.7 19 Problems in Chapter 4 23 Solution 4.1 23 Solution 4.2 23 Solution 4.3 24 Problems in Chapter 5 25 Solution 5.1 25 Solution 5.2 26 Solution 5.3 27 Solution 5.4 27 Problems in Chapter 6 29 Solution 6.1 29 Solution 6.2 30 Solution 6.3 30 Problems in Chapter 7 33 Solution 7.1 33 Solution 7.2 34 Solution 7.3 34 Solution 7.4 35 Solution 7.5 36 iii iv CONTENTS Problems in Chapter 8 37 Solution 8.1 37 Solution 8.2 39 Solution 8.3 41 Problems in Chapter 9 45 Solution 9.1 45 Solution 9.2 45 Solution 9.3 46 Solution 9.4 48 Problems in Chapter 10 51 Solution 10.1 51 Solution 10.2 52 Problems in Chapter 11 55 Solution 11.1 55 Solution 11.2 58 Problems in Chapter 12 61 Solution 12.1 61 Solution 12.2 62 Solution 12.3 62 List of Figures 2.1 Histograms of returns on indexes; 1962{1994 7 3.1 Histogram for IBM Stock Price 14 3.2 Histogram of IBM Price Changes 14 3.3 Histogram of IBM Price Changes Falling on Odd or Even Eighth 15 3.4 Histogram of Times Between Trades for IBM 15 3.5 IBM Price and Volume on Jan 4, 1988 17 3.6 IBM Price and Volume on Jan 5, 1988 18 3.7 IBM Bid/Ask Spread Histogram on Jan 5, 1988 19 12.1 Kernel Regression of IBM Returns on S&P 500 Returns 63 v List of Tables 2.1 Ten individual stocks for Problem 2.5 4 2.2 Periods for Daily and Monthly Data 4 2.3 Statistics for Daily and Monthly Simple and Continuously Compounded Returns 5 3.1 Input Data for Problem 3.1.3 12 3.2 Resulting Statistics for Problem 3.1.3 12 3.3 Simulation Results for Problem 3.5 16 3.4 Unconditional and Conditional Distributions of Bid/Ask Spreads 20 3.5 Contingency Tables 21 12.1 IBM Betas Relative to S&P 500 62 vii Preface The problems in The Econometrics of Financial Markets have been tested in PhD courses at Harvard, MIT, Princeton, and Wharton over a number of years. We are grateful to the students in these courses who served as guinea pigs for early versions of these problems, and to our teaching assistants who helped to prepare versions of the solutions. We also thank Leonid Kogan for assistance with some of the more challenging problems in Chapter 9. 1 Problems in Chapter 2 Solution 2.1 2.1.1 Recall the martingale property given by (2.1.2) and observe that the mean-squared error of the time-t forecast Xt of price Pt+1 is E[(Xt