T he A ssignment
You will be allocated a country to analyse.
(a) Create a log return series from the stock price index (the log return is the change in the logarithm of the stock price). Estimate an appropriate pure AR(p) model and an appropriate pure MA(q) model and compare these to a mixed ARMA(1,1) model. Carefully explain how your models were selected.
(40 % )
(b) Using your preferred model from (a), test for the presence of any ARCH
effects in the residuals and estimate an appropriate GARCH model. (30 % )
(c) By selecting an appropriate model in the GARCH family, test for whether there is any evidence of:
(i) a link between risk (conditional volatility) and the log return (15 % )
(ii) an asymmetric response to positive and negative volatility shocks. (15 % )