Examine the short-run and long-run causal
relationships between macro variables and stock market price.
For a country of your choice, download enough data (get the maximum number
of observations) on the following variables: stock market index, interest rate,
money supply (M2), and employment. Use this data to study the relationships
between stock market index, interest rate, money supply (M2), and employment. To
do so, you need to answer the following questions:
(i)Compute and discuss the descriptive statistics of your time series (in levels
and logs). Plot the series and describe patterns.
(ii)Report and comment on the ACF/PACF functions of stock market index,
interest rate, money supply (M2), and employment and their first-differences in log.
(iii)Use appropriate Dickey–Fuller tests to test if the variables stock market
index, interest rate, money supply (M2), and employment and their first-differences in log
are non- stationary (have a unit root) or not. Explain the test procedure, report the test
statistics and the appropriate critical values (at 5% significance level) and discuss the
results.
(iv) Test for cointegration among the four variables using Johansen’s tests.
Explain the test procedures, report the test statistics and the appropriate critical values (at
5% significance level). How many macro variables are cointegrated with stock market
price? Discuss the results.
(v)If you have found one or more cointegrating relations, estimate the longrun
causal relationships (i.e., the cointegrating relations) and the Vector Error Correction
Model. Otherwise, use the Box-Jenkins procedure to estimate a VAR model for the
appropriately transformed (de-trended or differenced) variables. Report the results of
Granger causality and the impulse response functions. What are the macro variables that
affect stock market price? Discuss the results.
(vi) Find three published papers on the relationship between stock market
price and macro variables and discuss/compare your results to those obtained in these
papers.
Use of Arial font size 11 for this assignment.
Overall word limit, 2500 words maximum.
The word count should:
• Include all the text, including title, preface, introduction, in-text citations,
quotations, footnotes and any other item not specifically excluded below.
• Include all the references at the end of the text (The reference do not count on
the overall word limit)
• Exclude diagrams, tables (including tables/lists of contents and figures),
equations, executive summary/abstract, acknowledgements, declaration and
appendices.
