Briefly explain any difference you perceive between the

characteristics of macroeconomic and financial data. Which

of these features suggest the use of different econometric

tools for each class of data?

(b) Consider the following autocorrelation and partial

autocorrelation coefficients estimated using 500

observations for a weakly stationary series, yt :

Lag acf pacf

1 0.307 0.307

2 0.013 0.264

3 0.086 0.147

4 0.031 0.086

5 0.197 0.049

Using a simple rule of thumb, determine which, if any, of

the acf and pacf coefficients are significant at the 5% level.

Use both the BoxPierce and LjungBox statistics to test the

joint null hypothesis that the first five autocorrelation

coefficients are jointly zero.

(c) What process would you tentatively suggest could represent

the most appropriate model for the series in part (b)? Explain

your answer.

(d) Two researchers are asked to estimate an ARMA model for

a daily USD/GBP exchange rate return series, denoted xt.

Researcher A uses Schwarzs criterion for determining the

appropriate model order and arrives at an ARMA(0,1).

Researcher B uses Akaikes information criterion which

deems an ARMA(2,0) to be optimal. The estimated models

are

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where ut is an error term.

You are given the following data for time until day z (i.e., t =

z)

Produce forecasts for the next four days (i.e., for times z + 1,

z + 2, z + 3, z + 4) from both models.

(e) Outline two methods proposed by Box and Jenkins (1976)

for determining the adequacy of the models proposed in part

(d).

(f) Suppose that the actual values of the series x on days z +1, z

+2, z + 3, z + 4 turned out to be 0.62, 0.19, 0.32, 0.72,

respectively. Determine which researchers model produced

the most accurate forecasts.