Least-squares factor model
As you've seen, there is a negative correlation between minimum quarterly returns and mortgage delinquency rates from 2005 - 2010. This can be made more precise with an OLS regression factor model.
You'll compare three factor models with three different quarterly dependent variables: average returns, minimum returns, and average volatility. The independent variable is the mortgage delinquency rate. In the regression summary, examine the coefficients' t-statistic for statistical significance, as well as the overall R-squared for goodness of fit.
The statsmodels.api library is available as sm.
This exercise is part of the course
Quantitative Risk Management in Python
Hands-on interactive exercise
Have a go at this exercise by completing this sample code.
# Add a constant to the regression
mort_del = sm.add_constant(mort_del)
# Create the regression factor model and fit it to the data
results = sm.____(____, mort_del).fit()
# Print a summary of the results
print(results.summary())