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Quantitative Techniques Framework
Table of Contents
Introduction 3
Stages in the Modelling Process 3
The Theory of Vacancy and Rent Determination 3
Derivation of Models for UK Office Rents and Vacancy Rates 4
Explanation of Regression Results 4
Regression for Vacancy of Offices 4
Regression for Rent of Offices 6
Autocorrelation and Unit Root Test Analysis 7
Analysis of actual values, fitted values and the residuals 10
Key Diagnostic Tests 11
The Role of Structural Break in the accuracy of the Models 14
Important Issues 15
Recommendations 15
References 16
1. Introduction Quantitative Techniques Framework
The assignment focuses on building the statistical models and the empirical estimation of those models employing the regression model as the main tool. The primary focus of this assignment is to develop statistical models for the vacancy rate of offices and office rents in the UK based on a multiple regression analysis.
The multiple variables considered for this report include the Gross Domestic Product of UK, office using employment, consumer price index, the office stock in main areas of UK and take up of office space in square meters from the year 1988 till the year 2014. The statistical software used in this analysis is one of the most authentic and commonly used software named E-views 8.
2. Stages in the Modelling Process
As the data has been provided in an excel sheet in the units of the respective variable. Firstly, it is important to convert the data into time series properly in the statistical software by inputting the data appropriately and carefully. Once the data has been input in appropriate format then it is important to identify the appropriate tests / models required for the analysis.
After the identification of the model, the tests are run and the model is interpreted to reach at the findings of the research. Different models have been considered for this analysis which includes the regression model, autocorrelation test and unit root tests. Apart from these, the basic diagnostic tests have been analysed to find out the normality, correlation and heteroskedasticity of the time series data collected for this report.
3. The Theory of Vacancy and Rent Determination
In accordance with Rowley, Tollison and Tullock (2013), the theory of vacancy and rent determination is a macro-economic theory that analyses the relationship between the vacancy of commercial offices and the rent offered for the vacant properties. The theory states that when the vacancy rates for the commercial properties is high; it leads to lower rent for the offices which are being rented. It is vice-versa in the case of lower vacancy rates for commercial properties in any country.
The theory states that the vacancy rate is solely determined by the demand for offices in the short-run because the supply of buildings cannot be changed in the short-run; the addition of buildings to the economy takes certain time. However, the supply can vary in the long-run; in the short-run, the demand and rent for commercial buildings are directly related to each other (Bourne, 2014).
4. Derivation of Models for UK Office Rents and Vacancy Rates
Two regression models are derived as a result of this analysis and these models have been drawn based on the following equation
Y = a + bx
Since there are multiple variables in the regression so the regression models formed look different but these are based on the basic equation known as the slope-intercept form. The C in the regression results is the intercept and other coefficients pertaining to each variable are taken into regression model which can be used to predict the future results…
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