Ace 427 Homework 1

ACE 427 Homework 1

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Spring 2016
Homework 1

The purpose of this homework is to introduce you to one of the most important concepts in
commodity price analysis—the random walk model. To obtain the data for the homework, go to
the farmdoc website and collect the US monthly average price received for hogs from January
1960 – November 2015. A downloadable Excel file with the data can be found at this link:
http://www.farmdoc.illinois.edu/manage/uspricehistory/us_price_history.html. The link for the
price data is at the bottom of the purple area of the tool.
1. Produce a line plot of the entire data series on one page. Do your best to format the chart
in a useful manner.
2. Produce a scatter plot where x is the previous month hog price and y is the current month
hog price. Note you will lose one observation when you construct the series for this plot.
In other words, generate a second price column which is the original data lagged by one
month, e.g. row #1 Feb 60 Jan 60; row #2 Mar 60 Feb 60, and so on. Show the
regression of y on x on the chart along with the equation and R2.
3. Generate the monthly change in hog prices. Simply subtract last month’s price from this
month’s price.
4. Produce a scatter plot where x is the previous change in the monthly hog price and y is
the current change in the monthly hog price. Note you will lose two observations when
you construct the series for this plot. Show the regression of y on x on the chart along
with the equation and R2.
5. Discussion:
a. What does the plot in #2 suggest about the predictability of monthly hog prices?
b. What does the plot in #4 suggest about the predictability of monthly hog prices?
c. How can the two predictability results be reconciled? Do some digging on the
random walk model. One well written paragraph is sufficient.