Applied Econometric s/Business Finance – Economics

RICHMOND THE AMERICAN INTERNATIONAL

UNIVERSITY IN LONDON

SCHOOL OF BUSINESS AND ECONOMICS

APPLIED ECONOMETRICS

This is individual work

Have look at London stock exchange index FTSE 250

(http://www.londonstockexchange.com/exchange/prices-and-

markets/stocks/indices/constituents-indices.html?index=UKX&industrySector=&page=1 ) or

FTSE 100 (http://www.londonstockexchange.com/exchange/prices-and-

markets/stocks/indices/constituents-indices.html?index=MCX&industrySector=&page=1 ).

You need to choose 10 firms from one index (FTSE 250 or FTSE 100) and from one of more

related sectors, such as bank and insurance, food and health and etc. Once you have chosen

your firms, you need to check where each firm has more than three years data, then download

daily closing prices for recent three years from yahoo finance

https://uk.finance.yahoo.com/quote/%5EFTMC/components?p=%5EFTMC or London stock

exchange website (http://www.londonstockexchange.com/home/homepage.htm ). You need

also to download monthly average risk free rate (Treasury bills – 3 month) from

(http://www.bankofengland.co.uk/boeapps/iadb/index.asp?Travel=NIxIRx&levels=1&XNote

s=Y&XNotes2=Y&Nodes=X4051X4052X4053X4058X3687X3764&SectionRequired=I&H

ideNums=-

1&ExtraInfo=true&A3765XBMX3687X3764.x=8&A3765XBMX3687X3764.y=3 ), and

either FTSE 100 or FTS 350 closing prices from London stock exchange website.

1- Calculate the daily return for your 10 firms and related index. Plot average and each firm returns against market return and comments on the shape, distribution and

correlation. Calculate the descriptive statistics and discuss the result.

(33.33 % of total marks)

2- Estimate the CAPM (Ei − r = βi (EM − r )), assuming the risk free rate is the same for all days over each month (assume the monthly rate as daily rate). Interpret

the result and comments on the reliability of the result by doing all diagnoses tests.

(33.33 % of total marks)

3- Explain why it is more reasonable to use daily return rather than stock price based on

the properties of time series. This should be based on reasonable tests of time series of

return and stock prices regarding stationarity and forecasting based on your firms and

index.

(33.33 % of total marks)