Question 2: Edward Saunders publishadanarticle that tested the pumibility that the stock market is a’ected by the weather on Wall Street. Using daily…

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Question 2: Edward Saunders publishadanarticle that tested the pumibility that the stock market is afl’ectedby the weather on Wall Street. Using daily data from 28 years, he estimated an equation with thefollowing significant variables {standard errors in pare-clithm):1 A. L DJi = at + 0.10XR1—1 + omme, — names + annasxq{0.01) (0.0006) (0.004} (0.0002)N=6.911 R2:l].02where:DJ; = theperoentagediangeintheDowJoneaindustrialaverageondaytR; = thedsflyindexoapitalgainorioasfordaytJ, = adummyvariableequaltolifthetthdwwasinJanuaryandUotherwiseM3 = adummyvariableequaltolifthetthdaywasahiondayandDotherwiaeC; = adummyvariableequaltolifthecloudooveronthetthday mmpermntmlmequalto—liithecloudomerwaamflperoentandDotherwise a) Saunders did not include an estimate ofthe constant term in his published estimation results. Which of the Classical Assumptions supports the conclusion that you shouldn‘t spend muchtime analyzing estimates of the constant term? Explain. b} Which of the Classical Assumptions would be violated ifyou decided to add a dummy variablethat was equal to i if the tth day was on either Tuesday, Wednesday, Thursday or Friday,and equaltosero otherwise. Notethat thestockmarket isnotopenonweekends. c) Carefully state the meaning of the eoeflioients of R and M, being sure to take into accountthe fact that R is lagged (one time period behind) in this equation for valid technical reasons. d} The-variableCisameasureofthepereentageoicloudeovufromsuufisetosunsetonthetthdagr and reflectsthefaetthatfiofaflfiewYork’srainfalhondaysfith iflflpercentcloud cover. In C ariurmmr variable? Whateonstraintsdoes it ptaoe on the equation? Whatother variable could havebeen used? e)1fyouweretofitthismodelagain, whiehvariablesmuldyoukeepandwhichwouldyouomit? Besuretoeonsidertheatatiaticalsigrfifieamaofeasheoefiident.

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