Written Assignment 2 Instructions page 1 ETC3460/ETC5346/BEX3460 Financial econometrics Written Assignment 2, 2017 Objectives: The Written Assignment 2 assessment task aims to a) Assist students to refine their understanding of the Part 2 unit material (Volatility modelling), b) Enable students to demonstrate their understanding of the relevant material in an empirical setting, and c) To assist students to be prepared for the final examination. General Instructions: This assessment is an individual assessment task. This assessment task contains two questions, with each question containing multiple parts. To get full credit you must answer all parts of each question. There is a 14 page Appendix to this Assignment that contains Eviews output regarding modelling of the daily share prices for Trambley Corporation shares (denoted as ‘P’ in Eviews) over the period from Thursday 2 January 2003 to Thursday 30 January 2014, inclusive. You will need to use the information in the Appendix to complete each of the questions in this Written Assignment. Appendix page 1 displays information relating to the share price series ‘P’ as well as to the corresponding Trambley Corporation share price (logarithmic) returns series, denoted as ‘R’ in Eviews. Appendix pages 2 through 10 provide model specification, estimation and certain diagnostic outputs for each of the nine different proposed models, labelled as ‘MODEL 1’ through ‘MODEL 9’. In addition, Appendix pages 11 through 13 provide one‐way tabulations for the relevant residuals for each of these nine models, and Appendix page 14 provides information regarding the price and return data over the last few days of the sample period, along with fitted values of residuals and conditional variances for each of the nine models corresponding to the last day of the sample period. Presentation requirements: Students may hand write or type their Written Assignment 2 answers, but the uploaded (submitted) document must be in PDF format and able to be read without difficulty. Help on how to create pdfs is available at http://www.buseco.monash.edu.au/talt/assets/documents/studentinstruction‐pdf.html. Due Date: This assignment is due (via the submission link on Moodle) on Thursday 25 May, at 10am.Written Assignment 2 Instructions page 2 Question 1 a) [5 marks] Detail the structure of MODEL 1 and explain what MODEL 1 assumes about the conditional mean and the conditional variance of the Trambley Corporation share price return on a given day ,ݐgiven information up to day ݐെ 1. b) [10 marks] Use the information from MODEL 1 to produce a one‐day‐ahead forecast distribution for the Trambley Corporation share price return on Friday 31 January 2014. Provide a model structure and justification for your approach and detail any additional assumptions needed to produce your forecast distribution. c) [10 marks] Use MODEL 1 to determine the following Value at Risk quantities relevant to the one‐day ahead forecast for Friday 31 January 2014 and an investment in Trambley Corporation shares worth $250,000 on Thursday 30 January 2014. In each case, provide sufficient details so that it is clear how you have obtained your answers. i) A parametric 1% Value at Risk, and ii) A non‐parametric 1% Value at Risk d) [10 marks] Explain the features apparent in the returns data that explain the numerical difference between your two Value at Risk estimates, and discuss which one might be preferable to the other, and why. e) [10 marks] Use the information from MODEL 1 to produce a two‐day‐ahead forecast distribution for the Trambley Corporation share price (one‐day) return to be observed on Monday 3 February 2014. Provide a model structure and justification for your approach and detail any additional assumptions needed to produce your forecast distribution. f) [10 marks] Given the observed Trambley Corporation share price on Thursday 30 January 2014 (available in the Appendix), report the median share price associated with a two‐day‐ahead forecast distribution for the share price to be observed on Monday 3 February 2014. Explain why this predicted median share price is not equal the predicted mean share price. [Note that you do not need to report the actual predicted mean share price to answer this question.] Question 2 a) [10 marks] Use the information provided in the Appendix to determine the most suitable model for the Trambley Corporation daily returns, from among all of the nine available models, MODEL 1 through MODEL 9. Report your selected model, detail its mathematical form, and explain what your selected model assumes about the conditional mean and the conditional variance of the Trambley Corporation share price returns. b) [15 marks] Explain the process you used to determine the model you selected in Part a). c) [10 marks] Use the information from your selection model from Part a) to produce a one‐day‐ahead forecast distribution for the Trambley Corporation share price return on Friday 31 January 2014. Provide the model structure for your forecast distribution, a justification for your approach and detail any additional assumptions needed to produce your forecast distribution. What is the corresponding annualized volatility that corresponds to this forecast distribution? d) [10 marks] Use your selection model from Part a) to determine the Value at Risk quantities relevant to the one‐ day ahead forecast for Friday 31 January 2014 and an investment in Trambley Corporation shares worth $200,000 on Thursday 30 January 2014. In each case, provide sufficient details so that it is clear how you have obtained your answers. i) A parametric 1% Value at Risk, and ii) A non‐parametric 1% Value at Risk