Financial Econometrics Exam Paper - FIN 36181

FIN 36181
FINANCIAL ECONOMETRICS
DEPARTMENT OF FINANCE
EXAMINATION QUESTION PAPER- Course Paper
COMPONENT OF CONTINUOUS ASSESSMENT
STUDENT NAME
STUDENT ID NUMBER
PROFESSOR (INSTRUCTOR)
DATE OF SUBMISSION

INTRODUCTION
The assessment uses the monthly time series for the US stock market index, treasury
bonds maturing in ten years, and the treasury bills maturing in three months. The data is assessed
using the financial toolbox in MATLAV r2018b. The three assets are imported to the software
for further analysis. The financial time series focus on the theory and practice of asset valuation
over a given period of time. This paper analyses data obtained for the three assets in the period of
1926 to 2017. The financial time series contain the element of uncertainty which is brought about
by the stock trends and economic trends in the operating region. For instance, cases of recess,
inflation and deflation affect the stock market alongside the other assets. The linear time series
models are implemented to assess the stationarity and the autocorrelation of the systems. The
return on assets is computed as either a one-period simple return or as a multi-period simple
return. For the simple net return for one period,
1+ Rt = Pt
Pt−1 ∨Pt =Pt −1 ( 1+ Rt )
Rt = Pt
Pt−1
−1= Pt−Pt−1
Pt−1
For the multi-period simple return, where k represents the different periods,
1+ Rt [ k ]= Pt
Pt −k = Pt
Pt −1 x Pt −1
Pt −2
x ... x Pt −k+1
Pt−k
¿ ( 1+ Rt ) ( 1+ Rt−1 ) ... ( 1+ Rt −k+1 )
¿ ∏
i=0
k−1
(1+ Rt −i)

The downloaded annualized simple returns on treasury bills are used on the risk-free rate. The
data is transformed into monthly simple returns using the formula,
1+ Rf ,t
annualized = ( 1+ Rf ,t
monthly )12
The equation is solved to obtain the monthly data as,
Rf ,t
monthly = (1+ Rf , t
annualized ) 1
12−1
RESULTS AND ANALYSIS
(i) Retrieving the data from the homepage of the Board of Governors of the Federal
‘reserve system’ on the Build package.
(ii) The selected ‘interests rates’ and ‘continue’ options were chosen to determine the
instrument to download.
(iii) The TB: US government securities/ treasury bills for the secondary market were
selected and the M3: 3 month data was downloaded.
(iv) The monthly frequencies were added to the package for the dates “Jan 1934” to “Aug
2018”.
Step I: Importing the downloaded monthly time series for the US stock market index, treasury
bonds maturing in ten years and treasury bills maturing in three months to MATLAB software
for data analysis.