Answer ALL questions

1. Download monthly data series from Object for the 20-year period of January 1998 to December 2017 for the following:

1. • the share price from a company that has been randomly assigned to you,

   • the S&P 500 Index (proxy for the market portfolio), and

   • the interest rate on a 3-month U.S. Treasury bill (proxy for the risk free rate).

Note: You will be provided with the name of the company assigned to you in the ‘Assessments’ folder in Introduction to Financial Econometrics site on DUO.

Upload the data into PcGive and calculate the monthly log returns for your company and for the S&P 500 index. Explain clearly the method you used. Provide graphs and descriptive statistics for the log returns. Discuss your results.

(20 marks)

2. Carry out an appropriate test to determine whether each log return series is stationary. Explain the testing procedure and the importance of the test results.

(20 marks)

3. Identify an appropriate univariate model for the estimation of your company return series. Comment on the procedure adopted and pay particular attention to the identification, estimation and diagnostic stages of the modelling process.

(20 marks)

4. Estimate the beta value for your share using a ‘market model’ specification and check the adequacy of the model using appropriate diagnostic tests. Formally test whether your company can be classed as defensive, neutral or aggressive.

(20 marks)

5. Briefly explain what you understand by the term ‘Global Financial Crisis (GFC)’. Using an appropriate econometric technique, test whether the beta value of your share is statistically different during the period between September 2007 and February 2009. Comment on your results.

(20 marks)