7SSMM603 Research Methods

Data Analysis Essay

20% of the Module Assessment

Word count: 1000 words excluding numbers and references

Submission deadline: 5pm GMT, 29th Nov 2024

As a market analyst at a leading financial firm in the United States, your supervisor has tasked you with

investigating the predictive power of certain firm-specific characteristics on stock returns. Specifically, you

are to examine the relationship between the following firm characteristics with firm stock returns:

• Market capitalization: The size of a company as measured by its total market value.

• Book-to-market ratio: The ratio of a company's book value to its market value.

• Earnings-to-price ratio: The ratio of a company's earnings per share to its stock price.

• Asset growth: The percentage change in a company's total assets.

Your analysis should:

1. Utilize a robust methodology: Employ the Fama-MacBeth regression approach to assess the

predictive power of these characteristics on stock returns (see Fama and French (1992)). This method

is a standard in empirical finance and provides a rigorous framework for examining cross-sectional

variation in returns.

2. Consider additional factors (Optional): Beyond the four characteristics mentioned, you may explore

the potential influence of other relevant variables, such as profitability, dividend yield, industry effects,

etc, to provide a more comprehensive understanding of stock return determinants.

Assignment:

Prepare a report to discuss the following:

a) describe the data sources and present relevant statistics including (but not limited to) descriptive

statistics, regressions outputs and regression diagnostic tests (50% of total marks)

b) discuss the results of your analysis carefully, considering the statistical significance of the estimated

coefficients, economic significance of the findings (20% of total marks)

c) discuss various econometrics issues (for e.g. endogeneity, multi-collinearity, serial correlation,

heteroskedasticity, etc) related to the data you handle (20% of total marks)

d) discuss the limitations of your analysis whenever applicable (5% of total marks)

e) discuss the implications of your findings (5% of total marks).

Hints:

Show clear logic throughout the report. Make sure the way of presentation in the report is clear and easy to

understand. Including test results that are irrelevant to the tasks listed above will affect the overall quality of

the report.

Recommended Data Sources:

Financial databases, for e.g. Compustat/CRSP (WRDS), Thomson Reuters DataStream, Bloomberg, etc.

Federal Reserve Bank of St Louis Federal Reserve Economic Data (FRED)

NYSE official website