FIN421 Econometrics for Finance
Group Coursework (worth 30% of the total module grade)
Submission deadline: December 12, 2024
Learning outcomes:
nstrumentalvariable regression, model diagnostic, and checking the weakness of instrumentalvariables. Analyse the properties of multiple time series and examine the long-run relationship
among the selected time series by cointegration tests. Describe the underlying economic hypothesis and discuss the empirical results.
Project background: This coursework assignment comprises two projects.
The first project is an exercise that investigates if the central bank’s interest rate decision affected by the stock market movement. The central bank’s mandate is to conductnetary policy aimed at inflation stability and production growth. The interest ratecision should not be influenced by the stock market fluctuation. Nonetheless, themacroeconomic factors which the central bank is targeting could also affect the estimating the reaction of monetary policy to stock market.
- The second project is modelling the long-run relationships of multiple financial time
potentially better prediction model could be built.Project content:
Suppose a researcher proposes the following model:
𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡. 𝑟𝑎𝑡𝑒 = α + 𝛽 ∗ 𝑠𝑡𝑜𝑐𝑘. 𝑟𝑒𝑡𝑢𝑟𝑛 + 𝑋 ′𝛾 + 𝜖𝑖𝑟𝑠𝑡𝑜𝑐𝑘. 𝑟𝑒𝑡𝑢𝑟𝑛 = 𝛿 + 𝑋 ′𝜃 + 𝜖𝑠𝑟
where X is the vector of macroeconomic variables that could affect both interest rate and stockmarket return. The researcher is interested in the estimation of 𝛽; that is, the effect of stock
return on interest rate. The data used in this project includes the monthly data on stock indexreturn, fed fund rate, and other 4 variables (credit_spread, term_spread, inflation, ch_indprod)that would serve as the macroeconomic factors (X). These macroeconomic factors are selectedas the proxies for the economic activity and consumer price condition the central bank istargeting. credit_spread is the difference in yield between theBAA and AAA corporate bonds,term_spread is the difference in yield between 10-year and 2-year government bond, inflationis the percentage change in the consumer price index, and ch_inprod is the change in theindustrial production index. Please download the related data by yourself from Bloomberg orWRDS. The time span of the data should be sufficiently long to cover at least 2 of the 3
important events: 1) global financial crisis in 2007-2009; 2) European sovereign debt crisis in2010-2012; 3) the Covid-19 starting from Mar 2020.a. Estimate the twospecified models using ordinary least squares (OLS) and reportthe regression 代寫FIN421 Econometrics for Finance results. Are theremulticollinearity issues in these models? Andplease briefly explain if the sign for each coefficient estimate is consistent withthe economictheory.Explain why the simple OLS might not be used to consistently estimate𝛽.Because instrumental variables (IVs) are hard to obtain, the researcher attempts toemploy Lewbel (2012, “Using heteroscedasticity to identify and estimate mis-measuredand endogenous regressor models.”)’s method to construct the IVs as follows:
Obtain the residuals 𝜖𝑠𝑟 with OLS.
- Calculate the 𝑋𝜖𝑠𝑟 as the instrumental variables Z. That is, Z =credit_spread*𝜖𝑠𝑟, …, ch_indprod*𝜖𝑠𝑟).
Estimate the instrumental variable regression using Z as the instruments ansummarize the results.
- Compare the results from OLS and IV regression and discuss the empiricalfindings. Could we conclude that interest rate decision is affected by stockreturns? If so, canwe say anything about the extent of the stock returns drivingthe interest rate decision?
Select two or more financial time series that might exhibit long-run equilibrium
relationship. That is, you should expect or have a hypothesis that they are potentially
cointegrated. The time series may be stock market index, foreign exchange rates,commodities price, or other macroeconomic variables. The choice of frequency couldbe daily, weekly, or monthly. The sampling period should cover the events offinancialcrises. The minimum length of sample is 10 years. In this project, you should discusstefollowing points:Why we should be interested in the proposed model and which time series is thevariable of main interest? Please explain the economic mechanism that driveshe equilibrium relationship.For each time series, describe their properties individually. Are they stationary
Are the multiple time series cointegrated as expected? That is, does the vectorerror correction model (VECM) conform with the formulated hypothesis?Compare theforecasting performance between the univariate and multivariatetime series models.Which approach is the superior one? What are the criteriayou use to examine the forecasting performance?
- Are the models stable? Here you could try splitting the sample into two nonoverlapping subsamples: one that includes financial crises and the other doesnot. Another option is to split them into two equal-length subsamples. For eachsubsample,repeat the modelling exercises (univariate and multivariate) and
compare their estimated results.How to create groups Each group shall include 3-4 students. Students are free to choose their group membersuntil November 13, 2024.
Project output A report which answers the questions asked in the project content. In the report, youshould also give a detailed explanation of the methodology to obtain your results. The sourcesof the data and cited references must be included in the Appendix. Eachgroup must fill in andsign the group contribution form together with thesubmission (the form is in the Appendix Aat the end of this document). The report must contain a minimum of 2,000 words and does notexceed 6,000 words, excluding the tables, appendix, and references.Assessment
he final mark will be based on the instructor’s evaluation of the report using the followingcriteria: The methodology is explained with sufficient details. The estimation results are reported along with clear explanation.The numerical results are very clear and interpreted for the reader. The source for the data is clearly specified. The references are listed alphabetically and follows the tandard of any internationaljournal.Table 1 shows how the overall marks of hypothetical students are calculated for the groupcoursework. Suppose you had a 4-member group. The group earned an 80 on the report. Thedefault assumption is each person contributed 25%. The grades will be adjusted by thepercentage above or below the presumed percentage as follows.1Student mark summary for the group project
Mike
35% 80+80*10%=88Sue 15% 80+80*(-10%)=72Note: In case that you cannot reach a consensus, we will meet with all members of a group atone time. We hope that we will not have to do this because we are not privy to the group'sactual contributions and would prefer you coming to a consensus by yourselves. The moduleleader reserves the rights to make special adjustments for individual marks in extreme cases.Important Notes: Late Submission of Assessed Coursework The University attaches penalties to the late submission of assessed coursework. You needto be familiar with the University’rules. Details can be found in the “Code of Practice forAssessment” available on e-Bridge in the ‘Student Academic Services’section under theheading ‘Policies and Regulations’.Mitigating Circumstances The University is able to take into account mitigating circumstances, such as illness orpersonal circumstances which may have adversely affected student performance on amodule. It is the student’s responsibility to keep their Academic Advisor, Programme, or Head of Department informed of illness and other factors affecting theirprogress during the year and especially during the examination period. Students whobelieve that their performance on an examination or assessed coursework may have beenimpaired by illness, or other exceptional circumstances should follow the procedures setout in the “Mitigating Circumstances Policy”, whichcan be found on e-Bridge in the‘Student Academic Services’ section under the heading ‘Policies andRegulations’.
Generative AI:The use of Generative AI is NOT permitted for this assessed coursework.Appendix A
GROUP MEMBER CONTRIBUTION FORM
FIN421 – Group Coursework The purpose of this document is to provide each group with an opportunity to reward or punishan individual's contribution to the group. All members of the group should discuss this form,fill in this form as directed, sign this form, and submit it with the report as the coversheet.Option 1: We agree that all group members made a valuable contribution and thereforebelieve it is fair that each member receive the same grade for the group project.Option 2. We disagree that all group members made a valuable contribution. Pleaseadjustour grades based on the following percentage of contributionIndividual Name (print)Percentage of contribution to thgroup coursework