Draft Assessment Brief – PostgraduateArtificial Intelligence Assignment
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| Programme: | MSc International Finance and Investment |
| Module Code: | AF7005 |
| Module Title: | Financial Econometrics and Forecasting II |
| Distributed on: | First Week |
| Submission Time and Date: |
Friday 14th May 2021. Time 11:59 am |
| Word Limit: | 3,000 Words |
| Weighting | This coursework accounts for 100% of the total mark for this module |
| Submission of Assessment |
Electronic Management of Assessment (EMA): This assignment should be submitted online via Turnitin by the given deadline. You will find a Turnitin link on the module’s eLP site. It is your responsibility to ensure that your assignment arrives before the submission deadline stated above. See the University policy on late submission of work (the relevant extract is set out below). |
Instructions on AF7005 coursework assignment:
You are required to answer all the following questions in this coursework assignment.
Question 1: (10 Marks)
Construct an investment strategy using the international stock market indices data (from the
database provided on the Blackboard site of the module). The strategy should be based on the
returns transmission effects across the stock markets in different geographical zones worldwide.
In particular, the strategy will focus on the idea of “heat waves” and “meteor showers” effects
originally introduced by Engle, Ito and Lin (1990).
Requirements:
You will estimate the parameters of the respective econometric models in the computer lab
(examples of estimations will be covered in the workshop sessions during the semester). Those
results will serve as the basis for the construction of an investment strategy and generation of
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signals for hypothetical trading transactions. Your task will be to use the obtained results and
simulate the chosen strategy in Excel. In particular, you should do the following:
A) Briefly discuss the econometric model, which you have chosen to use for your
trading strategy, and the relationships between the stock market indices, which it
explains.
(4 marks, 200 words approx.)
B) Calculate the overall return from your strategy for the entire period of the analysis.
(6 marks, 100 words approx.)
Question 2: (20 Marks)
Using the results for your model from Question 1 above, perform further analysis of the
performance of your trading strategy:
A) Assess the forecasting performance of the model and your strategy: you can use the
direction quality measures (or any other measures of forecasting performance, which
you find appropriate and can reasonably justify their use).
(10 marks, 200 words approx.)
B) Discuss the obtained results by commenting on the profitability of the strategy, its
risk and the stability of the returns.
(10 marks, 500 words approx.)
Question 3: (10 Marks)
Estimate the following VAR model with appropriate lag-order containing four macroeconomic
variables: annual inflation rate, output growth, Federal Funds Rate and market risk premium
for the US:
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