Question ONE a) Distinguish between the following terms as used in Financial Modelling: (i) Deterministic trend and Stochastic trend (ii) ARMA process and ARIMA process (iii) VAR model and VECM model (6 Marks) b) Describe the key financial characteristics that Figure 1.1 below exhibit. Which is the most appropriate model for modeling this financial feature? (Justify your answer) (3 Marks) Figure 1.1 Question TWO a) You obtain the following sample autocorrelations and partial autocorrelations for a sample of 200 observations from actual data: (i) Can you identify the most appropriate time series process of this data? (Justify your answer) (2 Marks) (ii) Use the Ljung-Box Q test to determine whether the first four autocorrelation coefficients taken together are jointly significant at 5% level of significance (4 Marks) b) Consider the following bivariate VAR(1): yt=A1yt1+utwhereA1=[0.60.00.40.3] Now, consider the effect at time t=0,1,2,3 and 4 of a unit shock on y2t at time 0 . Plot the impulse response functions of y1t and y2t to a unit shock of y2t. (Show all your workings) (8 Marks) Question THREE Use the STATA outputs below from VECM model to answer the following questions: - vec usd pounds, lac (2) ral) Vector error-correction model Cointangation erruabiors Tinntificat on: hata in axactly identifiej Goharger "oranilgatich restrictefor ingsech Required: (i) Write the fitted ECM model and interpret it. (4 Marks) (ii) The following outputs below are the oirf graphs from the fitted model written in (i) above. Interpret them (3 Marks) vec1, pounds, usd Graphs by irfname, impulse variable, and response variable 4