Select one of the stock series from the ‘CAPM.XLS’ Excel file, construct a set of continuously compounded returns, and then perform a time-series analysis of these returns. The analysis should include
(a) An examination of the autocorrelation and partial autocorrelation functions.
(b) An estimation of the information criteria for each ARMA model order from (0,0) to (5,5).
(c) An estimation of the model that you feel most appropriate given the results that you found from the previous two parts of the question.
(d) The 1-step ahead forecast, 2-step ahead forecast and 3-step ahead forecast given the results that you found from part (a) and (b).
(e) The construction of a forecasting framework to compare the forecasting accuracy of
i. Your chosen ARMA model
ii. An arbitrary ARMA(1,1)
(Hints: you need to compare MSE of the two models)
Marking scheme: This assignment is about data analysis with EViews, and 20 marks are allocated to each question. With the selected stock series, each question should be addressed in terms of snapshots from Eviews or tables in the submitted solution by students. Appropriate explanation may also be provided if necessary.
(a) ACF and PACF tables or figures should be provided. (20 marks)
(b) AIC and SIC comparison tables should be given from (0, 0) to (5, 5). Further explanation for model selection should be provided. (20 marks)
(c) The model estimation outputs should be given, and further explanation can be provided if any. (20 marks)
(d) Conduct the forecast by either manual calculation or EViews. (20 marks)
(e) The appropriate model evaluation criteria should be used, e.g. MSE. The quantitative evaluation measure should be calculated. (20 marks)
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