Question 4.8

4.8 Are McDonald's prices independent?

Over time, stock prices are always on the move. Consider a time series of 1126 consecutive daily prices of McDonald's stock from the beginning of January 2010 to the near the end of June 2014.1

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  1. Using software, plot the prices over time. Are the prices constant over time? Describe the nature of the price movement over time.
  2. Now consider the relationship between price on any given day with the price on the prior day. The previous day's price is sometimes referred to as the lag price. You will want to get the lagged prices in another column of your software:
    • Excel users: Highlight and copy the price values, and paste them in a new column shifted down by one row.
    • JMP users: Click on the price column header name to highlight the column of price values. Copy the highlighted values. Now click anywhere on the nearest empty column, resulting in the column being filled with missing values. Double-click on the cell in row 2 of the newly formed column. With row 2 cell open, paste the price values to create a column of lagged prices. (Note: A column of lagged values can also be created with JMP's Lag function found in the Formula option of the column.)
    • Minitab users: Stat→ Time Series→ Lag.

Refering back to Chapter 2 and scatterplots, create a scatterplot of McDonald's price on a given day versus the price on the previous day. Does the scatterplot suggest that the price series behaves as a series of independent trials? Explain why or why not.