Finance Homework
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FN285: Financial Modelling and Dealing
Assignment on Modelling Financial Relationships
August 2020
Assignment Weighting: 50% of the overall mark
Word limit: 1,250 words
The Purpose:
This is an individual assignment.
Its purpose is to provide you with an opportunity to appropriately apply the econometric techniques to model financial relationships using time series data and to interpret the results correctly.
In completing this assignment you should demonstrate:
· competence in the use of EViews;
· data collection skills and an ability to transform data into correct form for econometric analysis in finance;
· skills in presenting and interpreting summary statistics;
· skills in interpreting regression output;
· an ability to test the classical assumptions of the regression model and,
· an ability to present results in a professional manner.
The Task
(marks allocation for sub-tasks are shown in parentheses):
Your task is to model a linear financial relationship based on the arbitrage pricing theory (APT) – a brief explanation of the theory is required.
Your model should include 3 variables and be of the form:
Yt = + β1X1t + β2X2t + ut ut ~ N(0, σ2)
You will collect
monthly data
on: the prices for a stock; the S&P500 prices; Treasury bill yields for three months maturity; and, the consumer price index in the USA, to model.
Relevant data is available from: Yahoo Finance, FRED (The Federal Reserve Bank of St. Louis), IMF and the World Bank.
Specifically, you should:
1. Comment on what you intend to do and the arbitrage pricing theory (APT) that underpins the model you will be estimating. [5 marks]
2. Give a brief account on the source of your data and make the necessary data transformation. [15 marks]
3. Investigate the variables included in your model. Present in a table and interpret the respective summary statistics. [15 marks]
4. Estimate the model and test if it conforms to three of the classical OLS assumptions for the residuals: homoscedasticity; no serial correlation and normality. You are required to undertake any corrections that are feasibly possible. [25 marks]
5. Carefully specify the hypotheses for testing the individual coefficients and the F-test for overall significance [5 marks]
6. Interpret the R2, adj. R2 and F statistics. [10 marks]
7. Interpret the estimated coefficients in terms of their signs, significance and impact on the dependent variable. [15 marks]
8. All source material – websites, textbooks and lecture notes, articles and data sources – should be correctly referenced. [5 marks]
9. The report should be structured following the order of the tasks performed. The results should be presented in an appropriate format (note: cutting and pasting of EViews output is not advisable and should be avoided). [5 marks]
References
Data Websites
World Bank:
http://data.worldbank.org/
IMF:
http://www.imf.org/external/data.htm
(IMF)
Yahoo Finance:
https://finance.yahoo.com/
Federal Reserve Economic Data (FRED):
http://research.stlouisfed.org/fred2/
Texts
Asteriou, D. and S. Hall. Applied Econometrics, Palgrave Macmillan.
Barrow, M. Statistics for Economics, Accounting and Business Studies, Pearson.
Brooks, C. Introductory Econometrics for Finance, Cambridge University Press.