STOCK ECONOMETRICS
STOCK ECONOMETRICS
In Econometrics f-test what does the k stand for in the equation and what is it and why in this question?
Using ten years of monthly data a researcher uses Ordinary Least Squares
regression analysis to estimate the relationship between the return on a stock,
the FTSE Allshare Index and the Dividend Yield on the company. The
following equation is reported (the standard errors of the coefficient estimates
are given in brackets);
lnR = -0.00256 + 0.60214 lnFTSE – 0.09321 lnDIVY
(0.0321) (0.0832) (0.0310)
Using the equation F = (Rsquared/k-1) / (1-Rsquared/n-k)
Thank you
the k is the numbers of variables, in this case you are using just 2 variables plus the intercept (ln FTSE, ln DIVY and intercept).
So k = 3
The k is used because the results of the F equation is compared in a probability table and the equation has to count the variables and the data because it is an amount of information.
This means that I cant use thousand of variables and not to lose information. It is a probability issue. And on the other hand, if I put more months in the data I will add some information. So the n (or months in this case) is adding information and the numbers of variables is causing you lost information.
In other words, as an example, if I have 2 variables and 2 equation, the variables can be calculated. In least square, the variables are the variables you use and the data provides the equation if you add variables and no months you are making the system more difficult to calculate.
Of course, in econometrics there have to be a lot more equation that variables (so the beta is calculated choosing the best combination that minimize the square errors.
I hope I helped... and sorry about the language, Im not a native english speaker.
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