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ECON1195 Financial Econometrics
Assignment 2
This is an individual assignment comprises 25% of the overall assessment.
It consists of Two questions. You need to attempt Both two Questions. This
assignment is based on the relevant course materials (lectures, practice exercises,
R exercises, etc). It covers the lecture materials between week 1 and week 8.
Use 5% level of significance in all hypothesis test questions.
This assignment is due for submission on Canvas by Sunday, 16 May
11.59PM Melbourne time. Answers can be typed or handwritten
and scanned. You also need submit your R script on Canvas.
Academic Integrity/plagiarism: You can achieve academic integrity by
honestly submitting work that is your own. Presenting work that fails to ac-
knowledge other people’s work within yours can compromise academic integrity.
Submission guidelines: All work for Assessable Tasks is required to be
submitted on the due date and time as outlined in the Assessment Briefs. The
exception to this is where an approved ELS plan, an application for Special
Consideration or an approved Extension of Time is in place, submitted before
the task’s due date with appropriate documentation.
Re-submission: can only be authorised in specific circumstances by formal
RMIT committees. Please visit the RMIT appeals site,
for information for appealing a grade. Please visit the RMIT website,
https://www.rmit.edu.au/students/student-essentials/assessment-and-results, for
all information regarding adjustments to assessable work.
Late Submission: Work submitted within 7 calendar days of a due (or an
approved amended due) date may be accepted in exceptional circumstances but
will only be assessed as Pass (50%) or Fail. Work submitted beyond 7 calendar
days of a due date will be assessed as 0%.
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Question 1
Let rt denotes the return of a financial asset and σt denotes the standard
deviation of returns at time t,
(a) Write down an AR(1)-ARCH(q) model with q=4.
(b) Write down an AR(1)-GARCH(q,p) model with q=1 and p=2.
(c) Derive the unconditional means of AR(1)-ARCH(4) model and AR(1)-
GARCH(1,2) model in (a) and (b) (Show steps and specify the conditions
if required).
(d) Derive the unconditional variances of AR(1)-ARCH(4) model and AR(1)-
GARCH(1,2) model in (a) and (b) (Show steps and specify the conditions
if required).
(e) Discuss and compare an ARCH(1) model and a GARCH(1,1) model.
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Question 2
In this question, you need choose a stock from ONE of the followings:
1. JPM.csv contains the daily price of JPMorgan Chase & Co;
2. SBUX.csv contains the daily price of Starbucks Corporation;
3. FB.csv contains the daily price of Facebook, Inc;
4. NKE.csv contains the daily price of Nike, Inc.
(a) Explain why you choose this stock (Please do a due diligence of the
company’s background ( your selected company only), Do Not copy
online articles, etc).