Question 1 (40 marks): Interpret and Replicate an Academic Paper Read teaching materials and the paper by Chow and Wang (2010) “The Empirics of Inflation in China” to answer the following questions. Chow and Wang (2010) paper could be downloaded from the Blackboard.
1) On the first page, paragraph 3, the authors report “The Augmented Dickey–Fuller tests strongly suggest the presence of a unit root in log(�) and log(�2/�).” Verify this statement using the data provided in the paper. Report in detail the steps of your exercise with explanation. (10 marks)
2) On the first page, the last paragraph, the authors report “Let �� be the estimated trend deviation of the log price level or the error correction term. We then regress �log(��) on �log(�2�/��), �log(��−1), and ��−1 where �log(��) is defined as log(��) − log(��−1), …”. What is “estimated trend” referred to in the first sentence and for what purpose it should be estimated? Replicate the last two regression results reported at the end of this page. Illustrate your understanding of this model. Specifically, what is the purpose for this regression? How to interpret the estimated coefficients for this model? Illustrate your understanding that the coefficient on �� is negative. (10 marks)
3) Replicate both Figure 1 and Figure 2. (Hint: To obtain exactly the same graphs, the following options of Stata graph commands are required: ylabel, xlabel, yscale, xscale, xmtick, and yaxis. Key in ‘help graph’ in Stata command section to find out more). Provide your comments and interpretation on these graphs. Specifically, what can we learn from these two graphs? (10 marks)
4) On the second page, the second paragraph, the authors report “The following (table) reports the result of the Chow test for parameter stability using � = 1979 as the break point. The result provides extremely strong support for parameter stability of this equation.” Replicate the authors’ F-test result in the described table and verify the authors’ statement here. Why do we need to perform a structure break test in this case? What could be problematic if in this case we do have a structure break in the time series? Illustrate your understanding of the degrees of freedom of �-statistic reported in the table. Is there any limitation for this “Chow test for parameter stability” approach? (10 marks)
Question 2 (40%): Extend an Existing Study Read teaching materials and the paper by Chow and Lawler (2003) “A Time Series Analysis of the Shanghai and New York Stock Price Indices” to answer the following questions. Chow and Lawler (2003) paper could be downloaded from the Blackboard. Stata data file ‘cl_2003.dta’ on the Blackboard contains data to be used for this question.1 A detailed description for this data set is given in PDF file ‘cl_2003_data description.pdf’, which is also available from the Blackboard.
1) Verify the summary statistics reported in Table 1 – 4 of Chow and Lawler (2003) paper to confirm that ‘cl_2003.dta’ made available by the authors is not far different from the one been used in the paper. (10 marks)
2) In the same paragraph, the authors state that “The above result is one indication that the Chinese capital market was not integrated with the world market, but the degree of integration may increase in the future as China has become a member of WTO.” Collect data from DataStream to extend the sample period of the current dataset up to the last week of June 2018. Provide empirical evidence to test the conjecture made by the author in this statement. Note that China officially became a member of WTO on 11 December 2001. (10 marks)
3) Construct an ADL(3, 3) model to conduct pseudo out-of-sample forecasts of weekly rate of return of Shanghai stock market using historical returns of both Shanghai and New York markets, over 2017 Week 1 – 2018 Week 25, using regressions that begin in 2001 Week 1. Illustrate in detail your estimation steps and your comments on the results obtained. (10 marks)
4) Using data for rate of return of Shanghai stock market, estimate an AR(1) model with GARCH(1,1) errors. Plot the residuals from this AR(1) model along with ±�̂ � GARCH bands as in Figure 16.4 in Stock and Watson (2014). Do you observe any sharp increase or decrease in the variability? Provide your comments on the results obtained. (10 marks)
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