Anon

336 The Basics of financial economeTrics

−0.2 −0.15 −0.1 −0.05 0 0.05 0.1 0.15

−0.4

−0.3

−0.2

−0.1

0

0.1

0.2

0.3

GE

S&P 500

FiGuRe A.4 Scatter Plot of Monthly S&P 500 Stock Index Returns versus Monthly
GE Stock Returns

appears to be no distinct structure in the joint behavior of the data. How-
ever, by looking a little bit more thoroughly, one might detect a slight lin-
ear relationship underlying the two returns series. That is, the observations
appear to move around some invisible line starting from the bottom left
corner and advancing to the top right corner. This would appear quite rea-
sonable since one might expect some link between the GE stock and the
overall index.

conditional distribution

With the marginal distribution as previously defined, we obtain the fre-
quency of component x at a certain value v, for example. We treat variable
x as if variable y did not exist and we only observed x. Hence, the sum of
the marginal frequencies of x has to be equal to one. The same is true in the
converse case for variable y. Looking at the contingency or correlation table,
the joint frequency at the fixed value v of the component x may vary in the
values w of component y. Then, there appears to be some kind of influence