STOCK PRICES, OIL PRICE, AND EXCHANGE RATES:
AN ANALYSIS OF SHORT-RUN AND LONG-RUN RELATIONSHIP
In this assignment you will investigate the short-run and long-run dynamic relationships among the stock prices, oil price, and the exchange rates for a set of financial markets, using the econometric models of cointegration, vector error correction (VEC), and Granger causality. Download the daily data on the relevant stock market index, crude oil price, and the nominal exchange rate (relative to US $) for the period from 01/01/2011 to 31/12/2016 from the Datastream or Bloomberg database, or equivalent sources, for the following financial markets: United Kingdom, Turkey, one other developed market of your choice, and one other emerging market of your choice. Convert all variables in natural logarithms.
- [5 marks] Analyse the sample properties of the crude oil price and, for each country in your set, the sample properties of two variables: the stock market index and the nominal exchange rate. Present the appropriate descriptive statistics and comment on their features as well as their similarities and differences among these countries.
- [40 marks] Test all variables in your data sample for stationarity (use at least two different tests). For each country, test the stock market index, the nominal exchange rate, and the crude oil price for cointegration, as appropriate (use the Johansen’s procedure). In all tests pay special attention to the model specification (i.e. intercept, trend, the number of lags, etc.). Report and discuss the results for each country separately. Discuss any similarities and differences across countries.
- [40 marks] For each country, test for the evidence of Granger causality among these three variables, using an appropriately specified model (such as the VEC model if the series are cointegrated). Report and discuss the results for each country separately.
Discuss any similarities and differences across countries.
- [15 marks] How do your findings compare to the literature? Provide a brief discussion of differences and similarities of your results relative to the results reported in any three relevant academic sources of your choice, such as the journal articles or research papers (discussion papers or working papers).
Overall word limit, 2500 words maximum.