Apply a bivariate VAR model to the monthly log return on S&P500 and the monthly log return on your given index.

INSTRUCTIONS TO CANDIDATES

ANSWER ALL QUESTIONS

Report your estimation results and comment on the significance levels of the estimated coefficients. Comment on the meaning and significance of all the factors.

b. Is Fama-French a good model for the particular stock? Explain your answer with evidence from your computation.

(5 marks)

3. Conduct the ARCH-LM test on the residuals of the estimation of model (1) in question 2. Report and comment on the result of the test.

4.

(5 marks)

a. Estimate the Fama-French 3-factor model with GARCH(1,1) on the company stock return. Comment on the estimated result regarding the magnitude and significance of the model.

b. Discuss if introducing GARCH(1,1) for this model is appropriate.

(10 marks)

(5 marks)

5. Apply a bivariate VAR model to the monthly log return on S&P500 and the monthly log return on your given index.

Report the optimal lag-length table. What are the optimal lag lengths according to different criteria?

(3 marks)

b. Estimate the VAR model with [the number of lags assigned to you] to the log monthly return on S&P500 and the log monthly return on your given index. Report the estimation results. Perform a test to examine if the return on your given index Granger-causes the return on your given index. Report and comment on the test results.

(10 marks)

6. Regress the forward exchange rate on the spot exchange rate. Use the Engle-Granger approach to test for the cointegration between the spot exchange rate and the one-month forward exchange rate. What can you conclude about these two series?

(15 marks)

7. After completing the above tasks, critically reflect on the experience you had by doing this task, addressing the challenges that you have faced, how would you overcome them I the future, how the above exercises can be applied to real life problems and how it will enhance your personal skills developing you as one of the potential tomorrow global leaders.

(10 marks)

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