Quantitative Techniques in Finance and Investments
The model below is for an APT (arbitrage pricing theory)-type multiple regression analysis and it investigates what influences the rate of return on a company’s shares.
ERCOMPANYt = ?+?1ERSFTSEt+ ?2TERMt + ?3EXCHANGEt+ ?4INFLATIONt + ?5DMONEYt+ ?6OILt +?t (1) The dependent variable (ERCOMPANY) is the company’s excess return based on its
share price {labelled as COMPANY in the Excel data spreadsheet}. Note that you are expected to construct this variable yourself, knowing that excess return means the additional return on top of risk-free rate proxy, i.e., TBILLSHORT as explained below.
The explanatory variables are: I. ERSFTSE: excess rate of return based on the FTSE ALL SHARE index in
London Stock Exchange {labelled as FTSE in the Excel data spreadsheet}. II. TERM: The difference between annual returns on 20-year government bonds and 3-month treasury bills {labelled as TBILLLONG and TBILLSHORT,
respectively, in the Excel data spreadsheet}.