2nd SEMESTER 2024/25 Group Assignment

ECO310 - Econometrics of Time Series

This assessment takes the form. of a group research project (7-8 students in each group, except for one group), with group membership randomly assigned.

The coursework project is part of the assessment for the ECO310 module with a weight of 15% of the final mark for the module.

Project Task

Each project group is randomly assigned time series for the prices of 3 stocks sourced from DataStream,  which  contains  closing  prices  from  the  periods  of  December  30,  2016  to December 30, 2022.

Using  appropriate  time  series  econometric  techniques,  please  address  these  questions  in sequential order in your report. You are expected to present your report as if you are a team of investment analysts advising your clients.

1.   Evaluate  and comment on the trading performance of the three stocks during this period. You should use log-returns.

2.   Does any of the series display serial correlation and unit root? If so, what does this mean to a retail investor who has zero knowledge of time series analysis? You should attempt to explain these concepts as intuitively as possible.

3.   What is your forecast of the prices of all three stocks in the first three trading days of the year 2023? What  are your  expected  returns  if you hold  an  equally  weighted portfolio of the 3 stocks?

Hint: For each of the three series, develop a suitable ARIMA model and then use these to implement one-, two-, and three-step ahead out-of-sample forecasts.

4.   Further,  you  should  also  employ  appropriate  forecast  combination  technique  to develop a combined forecast model in forecasting the returns for each of the 3 stocks. Argue for the best forecasting model for each of the 3 stocks.

5.   Finally, which stock is likely to be the main driver of performance, among the three stocks you are assigned? Explain your reasoning.

Hint: You may find formal Granger causality tests, variance decomposition and impulse response function analyses to be useful.

If further analyses are deemed relevant and can strengthen your arguments, you can add more information that may be peripheral but in support of your arguments.

Submission and deadline

Note that group mark is the same for all group members. However, if the majority of students within a group are in consensus that a particular student has not participated and contributed in the group project, he/she would receive 50% penalty from the group’s project mark.

Each group should submit a report, with no less than 1000, but no more than 1200 words (excluding title page and Appendix), through LMO no later than 23:00, May 9 2025.

In each group one group member submits the assignment on behalf of all the group members on the LMO. Detailed student names and numbers of all group members should therefore be included in the front title page of the report submitted.

Late submissions policy: Late submissions will be penalized 10 marks for every working day past deadline. Late submissions will be accepted till +5 working days after the deadline.

Backup: If  for  some  reason   submission  through   LMO  fails,  students  can  send  their coursework to the module leader via e-mail:[email protected]

Assessment

The final mark will be based on the evaluation of the submitted report according to the following criteria (percentages out of total marks in parentheses):

(i) Data  & preliminary analysis (15 percent): Your report should have a clearly explained dataset with the indicated time period. The selection of the dataset and specific  details  such  as  handling  missing   observations  etc.,  as  well  as  the preliminary graphical analysis, should be included in the report.

(ii) Methodology  (15  percent): Econometrics  methodology  applied  in  every  step should  be  correct,  and  explained  clearly  and  sufficiently.  Specifically,  the rationale of applying each methodology should be justified given the empirical features observed in the dataset.

(iii) Written report quality, applications, and presentation of results (50 percent):

Overall, quality of the written report and the clarity of presentation of the results are very important criteria in the marking. The flows of the analyses implemented should be coherent, easy to follow, and make econometric senses. Any mistake made in terms of results’ interpretations will be penalized accordingly.

Note that proper use of English grammar and vocabulary is important.

(iv) Literature and  References   (10  percent):  Literatures  referred  to   should  be discussed and relevant, and then properly cited and referred to. References styling must be consistent following the Harvard referencing style. The studies that are utilized should be briefly discussed and referenced.

(v) Technical    appendix    (10   percent): All    the   E-Views    output    (or   other computational  tools  deemed  appropriate)  involved  in  guiding  the  empirical analyses must be included in the Appendix part. These should be clearly labelled and put in order according to the use in the project report.