A return that occurs in the last week of December is represented by In this case, the mean XYZ return is: O E(y I last week of December) Bo+ Bala + Bixi O E(y last week of December) Bo + B+B+Bixi O E(y I last week of December) - Bo + Balz OE(y I last week of December) - Bo + B3+ Bixi 10 and 1=1 XI 0 and 1 = 0 XI 0 and Is = 1 I= 1 and Is=0

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
icon
Related questions
Question

1

The model predicts returns on XYZ stock using returns on a market portfolio, represented by the Dow Jones Industrial Average (DJIA), and a nominal
variable that has three categories; that is, whether the return occurs in the first week of January, in the last week of December, or in any other week
besides these two. The two indicator variables, I and Is, represent the three categories of the qualitative variable.
A return that occurs in the last week of December is represented by
In this case, the mean XYZ return is:
O E(y I last week of December)= Bo + Balz + Bixi
O E(y I last week of December)= Be + B+Ba+ Baxi
OE(y I last week of December) Bo+ Balz
OE(y I last week of December) = Bo + B3 + B1x11
10 and 1=1
XI 0 and I = 0
XI 0 and Isw 1
I= 1 and I 0
Transcribed Image Text:The model predicts returns on XYZ stock using returns on a market portfolio, represented by the Dow Jones Industrial Average (DJIA), and a nominal variable that has three categories; that is, whether the return occurs in the first week of January, in the last week of December, or in any other week besides these two. The two indicator variables, I and Is, represent the three categories of the qualitative variable. A return that occurs in the last week of December is represented by In this case, the mean XYZ return is: O E(y I last week of December)= Bo + Balz + Bixi O E(y I last week of December)= Be + B+Ba+ Baxi OE(y I last week of December) Bo+ Balz OE(y I last week of December) = Bo + B3 + B1x11 10 and 1=1 XI 0 and I = 0 XI 0 and Isw 1 I= 1 and I 0
A calendar effect is an observed pattern in stock prices based on the calendar-for example, a rise or fall associated with a particular weekday or
month.
The most well-known effect is the January effect, a tendency for prices to increase (especially for small-capitalization stocks) in the first few weeks of
January. One explanation is that investors sell poor-performing stocks at year-end to reduce their capital gains taxes, thus depressing the prices. This
prompts investors to buy undervalued stocks during the first few weeks of January, causing their prices to go up.
In recent years, what has been observed instead is a rise in stock prices in the last week of December, between the Christmas and New Year holidays.
This December effect may reflect stock buyers' anticipation of the January effect.
Consider the returns on XYZ stock. A researcher makes the simplifying assumption that the January effect occurs during the first week of January. To
determine whether the January and December effects are present for this stock, he specifies the following model:
His regression model is as follows:
y
where y
XI
Po+Pix1 + P₂l₂ + Pals +
the daily return on XYZ stock
the daily return on the Dow Jones Industrial Average
11 if the return occurs in the first week of January; 0 otherwise
11 if the return occurs in the last week of December, 0 otherwise
Transcribed Image Text:A calendar effect is an observed pattern in stock prices based on the calendar-for example, a rise or fall associated with a particular weekday or month. The most well-known effect is the January effect, a tendency for prices to increase (especially for small-capitalization stocks) in the first few weeks of January. One explanation is that investors sell poor-performing stocks at year-end to reduce their capital gains taxes, thus depressing the prices. This prompts investors to buy undervalued stocks during the first few weeks of January, causing their prices to go up. In recent years, what has been observed instead is a rise in stock prices in the last week of December, between the Christmas and New Year holidays. This December effect may reflect stock buyers' anticipation of the January effect. Consider the returns on XYZ stock. A researcher makes the simplifying assumption that the January effect occurs during the first week of January. To determine whether the January and December effects are present for this stock, he specifies the following model: His regression model is as follows: y where y XI Po+Pix1 + P₂l₂ + Pals + the daily return on XYZ stock the daily return on the Dow Jones Industrial Average 11 if the return occurs in the first week of January; 0 otherwise 11 if the return occurs in the last week of December, 0 otherwise
Expert Solution
steps

Step by step

Solved in 2 steps

Blurred answer
Knowledge Booster
Risk and Return
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education