A) Many people believe that there is a “Friday effect” in the stock market but don’t necessarily spell out exactly what they mean by this. There is a sense that stock prices tend to be lower on Fridays than on other days. Because stock prices are readily available on the web, it should be fairly easy to test empirically this (alternative) hypothesis. Before collecting data and running a test, however, you must decide exactly which hypotheses you want to test because there are several possibilities.
Formulate at least two sets of null/alternative hypotheses. Then, gather some stock price data and test your hypotheses. Can you conclude that there is a statistically significant Friday effect in the stock market?
B) Suppose that monthly data on a time series variable exhibits a clear upward trend but no seasonality. You decide to use moving averages, with any appropriate span.
- Explain what systematic bias is, in your own words.
- Provide your reasoning for using moving averages in a situation like this.
- Will there tend to be a systematic bias in your forecasts?
- Justify your answer: why or why not?