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ECON2181

Introduction to Financial Econometrics

Undergraduate Programmes 2021/22

SUMMATIVE ASSIGNMENT

Answer ALL questions

a) Download the daily data series for the period between 1^st January 2019 and 31^st December 2021 for the following:

§ The share price from a company of your choice from WRDS Compustat/Datastream.

§ Choose a relevant proxy for the market portfolio for your share price.

§ Choose a proxy for the risk-free rate of return.

You do need to register your company of choice, which will be on a first-come first-served basis, and you cannot select the same company as another student.

Explain the relevance of your choice.

Transform the share and index prices into returns, plot the returns data, report the sample statistics, and examine whether the returns are normally distributed.  

(20 marks)

b)  Carry out a test for stationarity in your company prices (and return) and the market index (and the excess market return RM = M - rf). Carefully explain the test procedure and the importance of your results.

(20 marks)

c) Identify an appropriate univariate time-series model for your company’s return. Comment on the procedure adopted and pay particular attention to the identification, estimation and diagnostic stages of the modelling process.

(20 marks)

d) In finance it is customary to explain the changes in the excess return on an asset as a linear function of the excess return on the market portfolio, i.e.,  

where R_t is the excess return on a stock (with respect to the risk-free rate), RM_t is the excess return on a market index (with respect to the risk-free rate). Estimate the beta value of your company using the model described above and check the adequacy of the model.    

(20 marks)

e) Modify the model in part d) to investigate whether the spread of COVID-19 (which was formally recognised as a pandemic by the World Health Organization (WHO) on 11 March 2020) has had an impact on your company’s pricing model. Estimate the model and interpret your findings. Also, check the adequacy of the model.           (20 marks)

All results should be properly tabulated in the main body of the assignment along with any diagrams you deem appropriate. You should not include the raw PcGive output. This should be reformulated into your own tables. Keep your answers as precise and concise as possible. You should properly reference any relevant econometric literature (theoretical and applied) referred to in the text.

You should include the raw data and return series for the first and last months in the sample (i.e. January 2019 AND December 2021) in an appendix. Please do not include the full data set.

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.

Guidance on referencing can be found on Durham University website and in the Business School Students SharePoint Site.

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