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jxin2618 authored Nov 17, 2021
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Expand Up @@ -74,7 +74,7 @@ The thesis introduces five models to predict cash price. Two simple models invol
$$ DP_t = a_0 + a_1 DF_{t|t-1} + e_t \tag{1} $$
$$ DP_t = b_0 + b_1 (F_{t|t-1} - P_{t-1}) + e_t \tag{2} $$
- Brenner and Kroner Model(1995):
$$ DP_t = g_0 + g_1 DF_{t|t-1} + g_2 Dr_{t|t-1} + g_3 DI_{t-1} + g_4 D\sigma_{t-1} + g_5 D\rho(1)_{t-1} + g_6ECT_{t-2} + e_t \tag{3} $$
$$ \begin{equation} DP_t = g_0 + g_1 DF_{t|t-1} + g_2 Dr_{t|t-1} + g_3 DI_{t-1} + g_4 D\sigma_{t-1} + g_5 D\rho(1)_{t-1} + g_6ECT_{t-2} + e_t \tag{3} \end{equation} $$

The error correction term, $ECT_{t-2}$ is the residual, $e_{t-1}$ from the regression:
$$ P_{t-1} = h_0 + h_1 F_{t-1|t-2} + h_2 r_{t-1|t-2} + h_3I_{t-2} + h_4 \sigma_{t-2} + h_5\rho(1)_{t-2} + e_{t-1} $$
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