FN620: Applied Financial Econometrics
FN620: Applied Financial Econometrics
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FN620: Applied Financial Econometrics
Assignment 3
Submission Instructions:
You are required to answer all questions and submit your report on Moodle no later than 12
noon, December 8th 2021. Late penalties will be applied as per Programme Handbook.
All reports must be word processed. Your submission should consist of a single pdf file
containing the entire report. Any supporting Tables and Figures should be included in this
document.
General Instructions:
Write the report as if this was a task from your work manager who needs this analysis for a
meeting with his / her superiors. Fully explain all your work as not all readers of the report
may be familiar with Econometric analysis.
All questions carry equal marks. Marks for each part of the question are shown.
Questions
1) You have been given the Dataset ‘Economic and Financial development’ and asked to
analyse the theory that domestic stock market development drives economic growth for
the U.S., Ireland and any other country of your choice, i.e. you will analyse the
relationship for the three countries separately.
a) Write down a regression equation in levels that would be appropriate for analysing
the relationship. Explain the problems that may be encountered in estimating this
equation. (20 marks)
b) Test for the order of integration of each of the series that you are using in your
analysis. (40 marks)
c) For each country, estimate an appropriate model, considering your results in part b).
Interpret your results. (40 marks)
2) Shirley has been asked to investigate if GDP across countries is driven by a common
factor or common factors. Use Johansen’s methodology of cointegration to determine if
GDP is cointegrated for
a) The Eurozone countries covered in the Dataset ‘Economic and Financial
development’. (50 marks)
b) The USA, UK, Canada and Germany. (50 marks)
Interpret your results.
3) Using the dataset ‘US Quarterly Financial Market Data’, you are required to estimate a
Vector autoregression (VAR) model using the following (stationary) variables:
(i) The change in the Treasury-bill rate;
(ii) The change in the rate of Inflation; and
(iii) Term Spread (difference between 10-year bond yield and Treasury bill
rate).
Your analysis should:
a) Determine the appropriate lag length for the VAR model and write out in full the
equations of the model. (20 marks)
b) Conduct, interpret and report Granger-Causality tests for each variable and each
equation. What do you notice? (30 marks)
c) Present Impulse Response Functions for the estimated system. Explain the
importance of the ordering of the variables. What do you learn from these Impulse
Response functions? (25 marks)
d) Present the Forecast Variance Decomposition for each of the variables. What does
this analysis tell us about the interrelationships? (25 marks)