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In this assignment you will have to examine the causal relationships between finance and macro variables. For a country of your choice , download enough
In this assignment you will have to examine the causal relationships between finance and macro variables. For a country of your choice , download enough data (get the maximum number of observations ) on the following variables : stock market index , exchange rate , public expenditures, and investment . Use this data to study the relationships between stock market index, exchange rate, public expenditures and investment. To do so, you need to answer the following questions (i) [10 marks ] Compute and discuss the descriptive statistics of your time series (in levels and logs). Plot the series and describe patterns. (i) [10 marks ] Report and comment on the ACF /PACF functions of stock market index exchange rate, public expenditures , and investment and their first-differences in log. (iii) [20 marks] Use appropriate Dickey- Fuller tests to test if the variables stock market index exchange rate, public expenditures , and investment and their first - differences in log 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. (iv) [20 marks] Test for cointegration among the four variables using Johansen's tests . Explain the test procedures, 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 (v) [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 (de -trended or differenced ) variables . Discuss the results (vi) [10 marks] Find three published papers on the relationship between stock market price and the above macro variables and discuss /compare your results to those obtained in these papers. Overall word limit : 2500
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