EFN426: International Stock Market Integration - Statistics - Report Writing Assessment Answer

Subject Code: EFN426

Report Writing Assessment Answer

Assignment Task: Summary International stock markets have a tendency to move in the same direction. Peaks and troughs in one market index have been observed to coincide with peaks and troughs in indices from other national markets. Kasa (1992) posed the question: “...if prices in each individual country’s stock market have a random walk with drift component,... do [these random walk components] perhaps arise from the response of each country to a single, common ... factor?” 1 In Kasa (1992), the Johansen test is used to examine statistical cointegration between markets. In this assignment, you are required to use the Engle-Granger two-step method. Task description Do a visual inspection of the proposed linkage between the two markets. Just like Kasa (1992) would have done, start by looking at the stationarity properties of the two time series of interest individually. Report how you do this and what you find. Then proceed to investigate any possible long-run cointegrating relationships between them (recall how cointegration is defined, and hence when is it applicable). Report on your methods and findings. Could a vector autoregression (VAR) specification be used to examine the short-run relationship between the market dynamics? (Recall how a VAR is constructed; pay attention to the requirements on the variables used.) Can any predictive relationship be found? Report on your methods and findings An error correction model (ECM) can reveal whether the “balancing act” between two nonstationary series works towards a long-run equilibrium state. Investigate the short-run adjustment process here using ECM approach, one equation at a time (not VECM). Before you start A fundamental aspect of the above analysis (that you may already have thought of) is how you quantify the two markets. The data set has consumer price indices as well as exchange rates provided. There are a few ways to adjust the market indices for comparability: real-time inflation, the expectation of inflation, or general market conditions or dynamics. Taking these into account may change the results in some way, or they may not have any impact. Complete the task using inflation-adjusted real prices (CPI adjusted prices). Final remarks After completing the task as per instructions above, re-run the analysis with expected inflation-adjusted real prices (exchange rate adjusted prices) up to the long run cointegration part. As a final overarching conclusion, comment on the differences between these two adjustment methods in relation to the existence of long run equilibrium, and relate the conclusion to arbitrage opportunities in the international financial markets.

This Report Writing Assessment has been solved by our Report Writing experts at My Uni Paper. Our Assignment Writing Experts are efficient to provide a fresh solution to this question. We are serving more than 10000+ Students in Australia, UK & US by helping them to score HD in their academics. Our Experts are well trained to follow all marking rubrics & referencing style.