Econometrics
Employ the Box-Jenkins approach, identify the ARMA form of the assigned inflation rates following the steps below:
a. Plot the correlogram of the time series.
(2 marks)
From the correlogram, propose three models AR, MA or ARMA that could potentially be suitable for this time series. Provide justification for the choices.
(10 marks)
Estimate all of the proposed models and compare their Akaike Information Criteria to identify the most suitable model for the assigned inflation rate.
(15 marks)
Apply the Fama-French 3-factor model on the log return your assigned US company. The Fama-French 3-factor model has the following form:
(1)
(10 marks)
Is Fama-French a good model for the particular stock? Explain your answer with evidence from your computation.
(5 marks)
Conduct the ARCH-LM test on the residuals of the estimation of model (1) in question 2. Report and comment on the result of the test.
(5 marks)
Estimate the Fama-French 3-factor model with GARCH(1,1) on the company stock return. Comment on the estimated result regarding the magnitude and significance of the model.
(10 marks)
Discuss if introducing GARCH(1,1) for this model is appropriate.
(5 marks)
Apply a bivariate VAR model to the monthly log return on S&P500 and the monthly log return on your given index.
Report the optimal lag-length table. What are the optimal lag lengths according to different criteria?
(3 marks)
Estimate the VAR model with [the number of lags assigned to you] to the log monthly return on S&P500 and the log monthly return on your given index. Report the estimation results. Perform a test to examine if the return on your given index Granger-causes the return on your given index. Report and comment on the test results.
(10 marks)
Regress the forward exchange rate on the spot exchange rate. Use the Engle-Granger approach to test for the cointegration between the spot exchange rate and the one-month forward exchange rate. What can you conclude about these two series?
(15 marks)
After completing the above tasks, critically reflect on the experience you had by doing this task, addressing the challenges that you have faced, how would you overcome them I the future, how the above exercises can be applied to real life problems and how it will enhance your personal skills developing you as one of the potential tomorrow global leaders.
(10 marks)