Gary Martin is a research analyst at an investment firm in Chicago. He follows the oil industry and has developed a pretty sophisticated model that forecasts an oil company's stock price. However, given the recent strife in the Middle East, he wonders if simpler causal models might do a better job at predicting stock prices in the near future. He collects data on the daily adjusted closing price of Exxon Mobil Corporation (XO M ) as w ell as the Dow Jones Industrial Average (DJIA) for February 2011. A portion of the data is shown in the accompanying table; the full data set is on the text website, labeled XOM.
In a report, use the sample information to:
1. Estimate three models: (a) XO Mt = β0 + β1, DJI A t - 1 + εt, (b) XO Mt = β0 + β1XO Mt - 1 + εt, and (c) XO Mt = β0 + β1, DJI At - 1 + β0 + β2, XOMt - 1 + εt.
2. Determine which model best fits the data.
3. Use the most appropriate model to forecast daily stock price for March 1, 2011.