Modelling Financial Market Return and Volatility

Paper, Order, or Assignment Requirements

 

 

Title: Modelling Financial Market Returns and Volatility 

For the assignment you are required to choose a UK FTSE100 company stock market price and carry out the following modelling and forecasting exercise on the returns of the series using daily data for the last five years. Data can be collected from any source. Estimate an optimal random walk with drift model with a GARCH(p, q) and EGARCH (p, q) error structure. Use the AIC and SBC information criteria to choose the optimal model order. Keep 7 days of returns data to use for forecasting tests. Plot the historical and fitted values of returns over the historical period. Plot the forecasts of returns and volatility. 

In the modelling identify any key events over the period which dummy variables could be used in the mean part of the final random walk with drift + GARCH(p, q) model and drift + EGARCH(p,q) model. Does it improve the forecasting performance of the final model.

Your report should include a detailed descriptive analysis of the data and discussion of the selected stock. It should also include a literature review of up to ten academic articles on the application of volatility models in financial markets.

Your report should not exceed 2500 words.

Marking Guidelines:

Structure: 

Cover page – Appropriate page format for report
Executive Summary – Should summarize the aims and key findings (5 marks)
Contents Page – Sections and page numbers
Introduction – 1 page introduction to topic (5 marks)
Discussion on Stock – 2 pages background to the stock (10 marks)
Data Statistics – 3 pages over graphs levels/returns; summary statistics; (20 marks)
Econometric Methodology and empirical results – Presentation of models and literature applications, interpretation of results (50 marks)
Conclusions – ½ page conclusion of paper (5 marks)
References – (5 marks)

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