SUMMATIVE ASSIGNMENT  – ECON42115 Financial Modelling & Business Forecasting

Examine the causal relationships between finance and macro variables, as follows. For a country of your choice, download data for the period from January 2000 until December 2021 on the following variables: stock market index, inflation rate, output (Industrial Production), and interest rates. Use these data to study the relationships between stock market index, inflation rate, output (Industrial Production), and interest rates. To do so, you need to answer the following questions:

• [10 marks] Compute and discuss the descriptive statistics of your time series (in levels and logs). Plot the series and describe patterns. 
• [10 marks] Report and comment on the ACF/PACF functions of the stock market index, the inflation rate, output, and interest rate and each of their first log-differences.
• [20 marks] Use appropriate Dickey–Fuller tests to test if the above four time series and their first log-differences are non-stationary (have a unit root) or not. Explain the test procedure, report the test statistics and the appropriate critical values (at 5% significance level) and discuss the results.
• [20 marks] Test for cointegration among the four variables using the Johansen test. Explain the test procedure, report the test statistics and the appropriate critical values (at 5% significance level). How many macro variables are cointegrated with stock market price? Discuss the results.
• [30 marks] If you have found one or more cointegrating relations, estimate the long-run causal relationships (i.e., the cointegrating relations) and the Vector Error Correction Model. Otherwise, use the Box-Jenkins procedure to estimate a VAR model for the appropriately transformed (detrended or differenced) variables. Report the results of Granger causality and the impulse response functions. Which macro variables affect stock market prices? Discuss the results.
• [10 marks] Cite three published papers on the relationship between the stock market index and the above macro variables and discuss/compare your results to those reported in those three papers.

Overall word limit: 2500 SUBMISSION INSTRUCTIONS

Assignments should be typed, using 1.5 spacing and an easy-to-read 12-point font. Assignments and dissertations/business projects must not exceed the word count indicated in the module handbook/assessment brief.

 The word count should:

• Include all the text, including title, preface, introduction, in-text citations, quotations, footnotes and any other items not specifically excluded below. 
• Exclude diagrams, tables (including tables/lists of contents and figures), equations, executive summary/abstract, acknowledgements, declaration, bibliography/list of references and appendices. However, it is not appropriate to use diagrams or tables merely as a way of circumventing the word limit. If a student uses a table or figure as a means of presenting his/her own words, then this is included in the word count. 

Examiners will stop reading once the word limit has been reached, and work beyond this point will not be assessed. Checks of word counts will be carried out on submitted work, including any assignments or dissertations/business projects that appear to be clearly over-length. Checks may take place manually and/or with the aid of the word count provided via an electronic submission. Where a student has intentionally misrepresented their word count, the School may treat this as an offence under Section IV of the General Regulations of the University. Extreme cases may be viewed as dishonest practice under Section IV, 5 (a) (x) of the General Regulations.

Very occasionally it may be appropriate to present, in an appendix, material which does not properly belong in the main body of the assessment but which some students wish to provide for the sake of completeness. Any appendices will not have a role in the assessment – examiners are under no obligation to read appendices and they do not form part of the word count. Material that students wish to be assessed should always be included in the main body of the text.

Guidance on referencing can be found in the programme handbook and on Learn ULTRA.

MARKING GUIDELINES

Performance in the summative assessment for this module is judged against the following criteria:

• Relevance to question(s)
• Organisation, structure and presentation 
• Depth of understanding 
• Analysis and discussion 
• Use of sources and referencing
• Overall conclusions

The word count should include all the text (plus endnotes and footnotes), but                          

exclude diagrams, tables, bibliography, references and appendices. Guidance on referencing can be found in your Assessment handbook under ‘Things you Need to Know’ on Sharepoint.  

PLAGIARISM AND COLLUSION

Students suspected of plagiarism, either of published work or the work of other students, or of collusion will be dealt with according to School and University guidelines.

Your assignment will be put through the plagiarism detection service.

END OF ASSESSMENT

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