Financial Econometrics Assignments

ASSIGMENT 1: Testing the Capital Asset Pricing Model (CAPM)

Data Collection and Regression Analysis

1. Choose the Stock of a US or Canadian Corporation.

2. Down load its stock price series daily data over a period of at least two years (most recent).

3. Compute the stock returns.

4. Download the market index where your corporation is trading (daily data two years).

5. Compute the market return.

6. Download the 3 months T-Bills rate (either Canadian or US, daily data for two years).

7. Create two variables: Independent variable (R_j-R_f) and (R_m-R_f).

8. Run CAPM: (R_j-R_f) on (R_m-R_f) and get an estimate of beta.

9. Download two more independent variables: MV: which is the market capitalisation for stock I; and BTM which is the ratio of its book value to its market value of equity (daily over two years)

10. Re-run the Fama-French Model

11. Check for Heteroscedasticity

12. Check for Autocorrelation

13. Check for Multicollinearity

14. Perform the ADF, PP and KPSS unit root tests on all the variables and make sure that they are all stationary.

ASSIGMENT 2: Testing for Capital Market Efficiency and Financial Market Integration in North America

1. Plot the stock price and market index series in levels.

2. Plot the stock returns and market returns series (first difference).

3. Check for the normality of the return series using the JB test.

4. Perform the ADF, PP and KPSS unit root tests on the series in levels (price series) and the series in first difference (stock returns).

5. For weak form capital market efficiency use the market index in levels to explore whether the respective stock market is weak form efficient.

6. Download the market index of two other North American countries (Canada, US and Mexico) and perform Johansen cointegration test to see whether the stock markets are financial integrated. That is has NAFTA enhanced financial integration?

7. Perform granger causality tests, variance decomposition (table only no graphs) and impulse response functions (graphs only no tables) between the three stock market indices.

Outline of the Whole Paper: (Assignments 1 and 2)

1. Motivation and overview of the respective corporation over the last two years (2 pages;)

2. Empirical Methodology (8-10 pages):

1. CAPM
2. Fama French Model extension
3. Remedies and Violations of the CLRM: Heteroscedasticity, Autocorrelation, Multicollinearity
4. Unit Root Tests: ADF, PP, KPSS
5. Test for market efficiency: Random Walk
6. Cointegration tests: Johansen tests
7. Granger Causality tests
8. Impulse Response Functions and Variance Decomposition
9. Diagnostic tests

3. Conclusion and recommendation. (2 pages;)