# Financial Econometrics semester paper! - Repost - open to bidding

Budget $250-750 AUD

You should include all relevant tables and graphs generated in Eviews. All numeric

answers should be rounded to 3 decimal places as appropriate. You should show all

relevant calculations and working for all. Marks may be deducted for failure to show

working or calculations. Report your estimation output clearly in the main text. For

instance,

1

0.925 0.568 , 100,

ttt yyT

(26.44) (8.95)

where numbers in the brackets are t‐statistics.

Total marks: 37.

Purchasing Power Parity (PPP) states that the exchange rate between two currencies

over any period of time is equal to the ratio of the two countries relative price level.

While it is usually accepted that short‐run movements in the nominal exchange rate

are reflected in short‐run movements in the real exchange rate one expects that

offsetting movements of the relative price level will occur over time to leave the real

exchange rate unchanged in the long run. Thus we do not expect PPP to hold in the

short run but we do in the long run.

In the file [url removed, login to view] (available on iLearn), you are given quarterly data for the period

from 1982Q3 to 2009Q2 on:

E: Australia bilateral exchange rate with the USA (i.e. the exchange value of

$A 1 in terms of $US).

CPIAU: the Australian CPI price level (PAU)

CPIUS: the US CPI price level (PUS)

The real bilateral exchange rate with the USA is defined as the nominal exchange

rate adjusted for inflation in the domestic and US economy, i.e. E×PAU/ PUS.

Question 1 [3 marks]

Import the data series to Eviews. Plot the log of the data series in a single graph with

log(E) on the axis and log(CPIAU) and log(CPIUS) on the right axis (Hint: the plot

data series on different axes: double click the graph, in the Graph Options window, click Axes

& Scaling in the Option Pages box, assign left or right axis to each variable in the Series

axis assignment box.) and comment on the pattern of the graph.

Question 2 The Nominal Exchange rate [22 marks]

(a) [3 marks] Plot the sample autocorrelation and partial autocorrelation functions of

the log exchange rate (up to 12 lags) and comment on the pattern of ACF and PACF.

(b) [4 marks] Estimate an AR(1) for log(E) and write down the fitted equation. Is the

fitted regression model stationary? Why?

(c) [3 marks] Plot and comment on the sample autocorrelation and partial

autocorrelation functions of the residual of the estimated model (up to 12 lags).

Hint: you should also relate your comment to the no serial correlation assumption of

error term.

(d) [6 marks] Conduct the Ljung‐Box Q(4) tests for the residual of the estimated

model. You should state the null and alternative, calculate the Ljung‐Box Q‐

statistics by hand (hint: use the sample ACF obtained from part (c)), state the decision

rule (using the 5% level of significance), and your conclusion.

(e) Provide a dynamic forecast for the sample period of 2008Q2 to 2009Q2 using

Eviews.

(1) [2 marks]Report the forecast graph automatically generated by Eviews.

(2) [4 marks] Plot the forecasted values, the prediction intervals, and the

original time series for the whole sample period in a single graph (see, for

example, question 3(d) in tutorial week 10) and comment on the prediction

output.

Question 3 The US CPI price level [12 marks]

(a) [6 marks]Plot the sample autocorrelation and partial autocorrelation functions of

the level and the first difference of the log CPIUS (up to 24 lags) and comment on

the pattern of ACFs and PACFs.

(b) [3 marks] Estimate a seasonal ARMA(2,0)4 for log(CPIUS) and write down the

fitted equation.

(c) [3 marks] Plot and comment on the sample autocorrelation and partial

autocorrelation functions of the residual of the estimated model (up to 12 lags).

Hint: you should also relate your comment to the no serial correlation assumption of

error term.

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