ECON 201FS MSFT Daily Realized Variance: Factor Analysis and Time-Lagged Regressions By: Zed Lamba

Background + Mathematics ECON 201FS Background + Mathematics All data is for a 10 year period 5-minute returns examined to minimize microstructure noise Use log returns and daily realized variation Daily Realized Variation where: rt,j = log return M = # returns/day

Tech Stocks in S&P 100 (besides MSFT) ECON 201FS Tech Stocks in S&P 100 (besides MSFT) AAPL – Apple, ignored due to lack of trustworthy data CSCO – Cisco Systems DELL – Dell EMC – EMC Corporation (data storage, competes with IBM, HP, etc.) HPQ – HP IBM – IBM INTC – Intel ORCL – Oracle TXN – Texas Instruments UTX – United Technologies XRX – Xerox

ECON 201FS MSFT Daily RV

CSCO Daily RV (Corr with MSFT Daily RV = 0.7278) ECON 201FS CSCO Daily RV (Corr with MSFT Daily RV = 0.7278)

DELL Daily RV (Corr with MSFT Daily RV = 0.4856) ECON 201FS DELL Daily RV (Corr with MSFT Daily RV = 0.4856)

HPQ Daily RV (Corr with MSFT Daily RV = 0.6399) ECON 201FS HPQ Daily RV (Corr with MSFT Daily RV = 0.6399)

IBM Daily RV (Corr with MSFT Daily RV = 0.6829) ECON 201FS IBM Daily RV (Corr with MSFT Daily RV = 0.6829)

ECON 201FS Factor Analysis

Factor Analysis Conclusions I ECON 201FS Factor Analysis Conclusions I Based upon default mineigen(0) criterion, only eigenvalues > 0 indicate factors worth retaining Factor 2 basically not worthy of being retained Uniqueness = % of variance not explained by factors High uniqueness (> 0.6) implies factors cannot explain variable well

Factor Analysis Conclusions II ECON 201FS Factor Analysis Conclusions II 1 Common Factor explains Daily RV of all stocks other than DELL well Flashback: DELL’s Daily RV had low correlation with that of MSFT, unlike all the other stocks

Time Lagged Regressions I ECON 201FS Time Lagged Regressions I MSFT Daily RV self-lagged by 1, 5, and 22 to look back a day, week, and month, respectively. Predictive power decreases as lag increases.

Time Lagged Regressions II ECON 201FS Time Lagged Regressions II MSFT against all other stocks lagged by 1, 5, and 22 days. DELL 5-day lag is moderately strong.

Time Lagged Regressions III ECON 201FS Time Lagged Regressions III MSFT against all other stocks, as well as MSFT, each lagged by 1, 5, and 22 days. Seems to indicate OVB in previous regression, as MSFT self-lagged predictive power seems diminished.

Time Lagged Regressions IV ECON 201FS Time Lagged Regressions IV More OVB seems to be indicated, as all coefficients smaller/similar to before.