Financial econometrics


You are a Junior Analyst for F& H Investment with the responsibility of tracking stock in the FTSE-100 index. Your boss proposes to upgrade the financial risk management methodology the company uses. Your boss further proposes that, after several successful years of operation in the UK, the company is now considering expanding its operation to cover other European countries.


As the financial analyst, you are required to analyse Vodafone Plc a FTSE-100 stocks. Details on the estimated Eviews outputs for Vodafone are provided in the additional file.




Part 1.

For each of the series:

  • Perform the ADF and KPSS tests of stationarity in EViews, clearly stating your hypotheses. Comment on your results in line with relevant financial theory. [15 marks]


  • Estimate the best fitting ARMA/ARIMA model, following the Box-Jenkins methodology. Assess the adequacy of your results and formulate appropriate diagnostic procedures. Produce dynamic “out-of-sample” forecasts for the returns and discuss your findings about their accuracy.                                                                                                 [30 marks]


  • Your boss suggests using ARCH(1) process to model the returns volatility. You disagree and wish to convince your boss that a GARC(1,1) process is better. Estimate both models and try to convince your boss about the preferability of the model you are proposing.                                                                                                                      [25 marks]


Part 2.

Pair the FTSE-100 index with any other two (2) country stock indices (posted on Blackboard) and test for cointegration among the pairs of variables by applying the Engle-Granger (EG) approach. Critically comment on your results.                                                                                                                                                                                                                                                               [20 marks]


A well laid-out structure and presentation (executive summary, referencing, layout)       [10 marks]

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