Empirical Asset Pricing Project

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The purpose of empirical asset pricing project is to predict the future returns of a portfolio based on its historical data. For this purpose, the historical data of 7 years is employed and via two different approaches three time series models are formed. Portfolio returns for the first ten months of 2012 – months between 1 January 2012 and 1 November 2012- are predicted using these models. Two different econometric approaches that are compared in the scope of this analysis consist of one structural multi-variate model and two uni-variate models. In this study, the predictive powers of these three models are investigated and the aim of detecting the best fitting model to the reality is carried out throughout the analysis. Initially, monthly stock price data of eight growth stock companies that generates our portfolio was downloaded from the WRDS database with the months ranging of January 2005 to December 2011 (Raw_Data_Stocks sheet in Excel). The companies that constitute the portfolio are; Apple, Inc. (AAPL), Apollo Investment Corporation (AINV), ArthroCare Corporation (ARTC), Atwood Oceanics, Inc. (ATW), B&G Foods, Inc. (BGS), BlackRock, Inc.(BLK), Cerner Corporation (CERN), CoBiz Financial, Inc.(COBZ), Copano Energy LLC (CRNO). Stock price data of Copano Energy for given dates was not available on the database, therefore it was excluded from the analysis. Besides, monthly Fama-French 3 factor data was downloaded for the same period. However, three factors data for November of 2012 were not available on Kenneth French’s website. For this reason; the analysis is conducted for the first ten months of 2012, until November. In order to compare our models in Stata, equally-weighted returns (EWR) and value-weighted returns (VWR) of the portfolio were calculated (Portfolio Returns sheet in Excel). Thus, all of the necessary data to form the models to be used in the analysis – the monthly portfolio returns and the monthly Fama and French 3 factors; market, size and...
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