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Postgraduate Programmes 2023/24

GROUP SUMMATIVE ASSIGNMENT – FINN41715

Econometric Methods 

The group project consists in producing a report that examines the relationship between inflation and stock market. To complete the analysis, collect monthly data on the following variables for a country of your choice: (1) stock market index, (2) inflation rate, (3) sovereign 5-year CDS spread, (4) output (industrial production), (5) government bond interest rate, (6) money supply M1, (5) exchange rate (if you are analysing the US, use the USD Index).

Empirical analysis

The following model describes the simultaneous relationship between Rt and Inflation:

where Rt is return on stock market index, Inflationt is inflation rate, ΔSpreadt is change in the CDS spread, ΔIPt is change in industrial production, ΔSpreadt is change in interest rate, ΔMSt is change in money supply and ΔExchanget is change in exchange rate (depending on the measurement units, in some cases you might need to calculate the change in natural logarithm of the variable instead of the change in the variable itself).

1. Estimate model equations (1) and (2) using Two-Stage Least Squares (2SLS) method. Report the estimation results and interpret them: comment on the sign, size and significance of the coefficients.

2. Perform the necessary tests to check whether the instruments (lists of instruments in this case) satisfy the two conditions of instrument validity: relevance and exogeneity. Report and explain the test outcomes.

3. Re-estimate each of the model equations (1) and (2) separately using Ordinary Least Squares (OLS)? Report the estimation results and comment on how these compare with 2SLS results in terms of the coefficients’ sign, size and significance.

4. Perform the Hausman test for endogeneity. Based on your results discuss whether it was justified to employ 2SLS methodology rather than OLS in the first place?

General guidelines

The report should include the following parts: Introduction, Literature Review, Empirical Analysis, Limitations & Improvements, Conclusion.

· Introduction [5%] – provides brief background into the topic.

· Literature Review [20%] – surveys existing literature on the relationship between stock markets and inflation, including studies on both simultaneous and one-way relationships. Aim to cite around 10 published papers.

· Empirical Analysis [50%] – presents and analyses the results of the empirical analysis outlined in points 1-4 above. The analysis should provide a thorough discussion and economic interpretation, rather than mere description of the results.

· Limitations & Improvements [20%] – outlines the main limitations of your analysis and potential improvement proposals. The proposals must be specific and detailed in terms of the methods and the data required.

· Conclusion [5%] – summarises the report findings.

Some more comments

- Data & Code

Aim to collect 20 years of data (for some countries you might get shorter period depending on data availability). Submit the data file along with the report. State all data sources. Do not submit the code and do not include blocks of code in the report. 

- Methodology

The empirical analysis methodology is provided in the assignment task and is the same for everyone. Hence, do not waste the word limit on copying/pasting the methodology into the report.

- Organisation

The report should have a clear and coherent structure and be proofread. Figures and tables must be numbered, clearly annotated, readable (avoid bad quality screenshots), and be referred to and discussed in the main text.

- References

All references that you include in the bibliography must be cited in the main text. The referencing style should be consistent.

Good practice tips for group work

- Keep minutes of each meeting that specify the tasks allocated to each member and the status of those tasks from meeting to meeting.

- Keep any drafts/codes/notes that demonstrate your contributions until the marking is complete.

- Note: you do NOT need to submit either the minutes or the drafts/codes/notes with the report. These will only be requested if a case of insufficient contribution by some member(s) is raised.

Good luck!

Overall word limit: 2000

SUBMISSION INSTRUCTIONS

Your completed assignment must be uploaded to Learn ULTRA
no later than 11:59am (UK time) on December 5, 2023.

For advice on groupwork please see; Student Information Hub – Group work

It is your responsibility to back up your work. IT issues are not a valid reason for a late submission.

You should back up your work on more than one device.

A penalty will be applied for work uploaded after 11:59am as detailed in the Late submission policy.  You must leave sufficient time to fully complete the upload process before the deadline and check that you have received a receipt. At peak periods, it can take up to 30 minutes for a receipt to be generated.

Assignments should be typed, using 1.5 spacing and an easy-to-read 12-point font. Assignments and dissertations/business projects must not exceed the word count indicated in the module handbook/assessment brief.

 The word count should:

§ Include all the text, including title, preface, introduction, in-text citations, quotations, footnotes and any other items not specifically excluded below.

§ Exclude diagrams, tables (including tables/lists of contents and figures), equations, executive summary/abstract, acknowledgements, declaration, bibliography/list of references and appendices. However, it is not appropriate to use diagrams or tables merely as a way of circumventing the word limit. If a student uses a table or figure as a means of presenting his/her own words, then this is included in the word count.

Examiners will stop reading once the word limit has been reached, and work beyond this point will not be assessed. Checks of word counts will be carried out on submitted work, including any assignments or dissertations/business projects that appear to be clearly over-length. Checks may take place manually and/or with the aid of the word count provided via an electronic submission. Where a student has intentionally misrepresented their word count, the School may treat this as an offence under Section IV of the General Regulations of the University. Extreme cases may be viewed as dishonest practice under Section IV, 5 (a) (x) of the General Regulations.

Very occasionally it may be appropriate to present, in an appendix, material which does not properly belong in the main body of the assessment but which some students wish to provide for the sake of completeness. Any appendices will not have a role in the assessment - examiners are under no obligation to read appendices and they do not form part of the word count. Material that students wish to be assessed should always be included in the main body of the text.

MARKING GUIDELINES

Performance in the summative assessment for this module is judged against the following criteria:

· Relevance to question(s)

· Organisation, structure and presentation

· Depth of understanding

· Analysis and discussion

· Use of sources and referencing

· Overall conclusions

The word count should include all the text (plus endnotes and footnotes), but exclude diagrams, tables, bibliography, references and appendices. Guidance on referencing can be found on Sharepoint; Examinations and Assessment (sharepoint.com)