# National Stock Market Indices

SUMMATIVE ASSIGNMENT

In this assignment you will have to examine the short-run and long-run dynamic relationships
among national stock market indices.
observations) on each country’s national stock market index quoted in U.S. dollars.
Transform the data in the natural logarithms. Use the transformed data to answer the
following questions.
(i) Compute and discuss the descriptive statistics of your four time series (logarithms of
four national stock market indices) and their first differences. Plot the series in levels
and in first differences, and describe patterns.

[15 marks]
(ii) Plot the ACF and PACF for each of the series in levels and in first differences.
Describe the patterns and comment on the implications for the further analysis of
these series.

[15 marks]
(iii) Use appropriate unit root tests to test if these four time series (logarithms of national
stock market indices) and their first differences are stationary. Explain the test
procedure, report the test statistics and the appropriate critical values (at 5%
significance level) and discuss the results. Depending on the outcome of the test
procedure, choose EITHER part (iv.a) OR part (iv.b) for the next step, and explain

[20 marks]
(iv) (a) Use the Box-Jenkins procedure to estimate a VAR model for the four variables.
Explain the choice of the model specification and the model diagnostics tests. Report
the results of Granger causality tests, the impulse response functions, and the
variance decomposition. Do your results depend on the ordering of the variables in
the VAR system? Why or why not? Compare and discuss the results from VAR
estimation with two different orderings. Which ordering would you recommend and
why?

[40 marks]

Financial Modelling & Business Forecasting 2018/2019 Masters Programmes

(v) (b) Test for cointegration among the national stock market indices using Johansen’s
tests. Explain the test procedure, report the test statistics and the appropriate critical
values (at 5% significance level). If you have found one or more cointegrating
relations, estimate the long-run relationships (i.e., the cointegrating relations) and the
Vector Error Correction Model. Otherwise, estimate the short-run relationships
among the variables using an appropriately specified VAR model. Discuss the
results.

[40 marks]
(vi) Find three published journal articles on the relationship among national stock market
indices (not necessarily the same as in your work) and discuss/compare your results
to those obtained in these papers.

[10 marks]

Overall word limit, 2500 words maximum.

The word count should:
 Include all the text, including title, preface, introduction, in-text citations, quotations,
footnotes and any other item 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

Financial Modelling & Business Forecasting 2018/2019 Masters Programmes

– 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.

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