The fairness danger premium is the surplus return an investor is compensated for minus the risk-free charge (six-month US Treasury). Taking a look at BRKB returns we’ll use statistical testing to drive additional insights on the fairness danger premium affecting trailing returns.
Wanting on the distribution of returns
First, we will take a look at whether or not the distribution of returns is statistically totally different from two time intervals from 1996–2010 to 2011-current utilizing the KS-test. The outcomes present that we get a p-value of .057 which is nearly statistically vital on the 5% degree.
Testing For Heteroskedasticity
Subsequent, we will take a look at if our information is heteroskedastic, which happens when wanting on the relationship between the fairness danger premium and the returns. This implies when our x and y variables improve the space between information factors will get extra unfold out.
When conducting the Breuch Pagen take a look at we get a p-value of .693 from 1996–2011 and a p-value of .66 from 2012-current. This tells us there isn’t any heteroskedasticity within the ancient times, and no heteroskedasticity at the moment, confirming what we see from our graphs.
Testing for Structural Change
Subsequent, we will run the Chow take a look at to see if there’s a structural change within the relationship between returns and the fairness danger premium giving us a p-value of .005.
From our statistical assessments, heteroskedasticity was not current in each intervals. We concluded that the returns from 1996–2010 and 2011-currently are borderline statistically vital on the 5% degree. The outcomes from our Chow take a look at confirmed that there was a structural change within the relationship between the 6m-trailing fairness danger premium and the 6m-trailing returns for BRKB.
Code will be discovered right here
https://github.com/Gaiden-Spence/Equtiy-Risk-Premium-Analysis/blob/main/treasury_spread.ipynb
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