ECON3371 Financial Econometrics Assignment

Assignment Help Financial Econometrics

Reference no: EM132484180 , Length: word count:4500

ECON3371 Financial Econometrics - Durham University

PART A:
You are bank analyst tasked with predicting defaults on bank loans. You are given a dataset on past loans and their outcomes. The data consists of:

• D: default (0 for repayment, 1 for default).
• Loan characteristics:
o A: amount of the loan.
o R: duration of repayment in months.
o I: interest rate on the loan.
• Applicant characteristics:
o L: duration of current employment (0 if unemployed).
o Y: annual income.
o H: home ownership (0 for rented, 1 owned).

Follow the instructions on DUO for downloading the dataset corresponding to your student ID number.

Question 1. Predict default based on all other variables using LPM, probit, and logit. Describe your findings.

Question 2. What is the effect of a 10% increase in the size of a loan? Explain how you arrived at this estimate.

Question 3. Evaluate the hypothesis that the loan characteristics do not predict default. Discuss your finding.

Question 4. Compute the percentage of correctly predicted defaults in sample for each of your estimated models? Discuss your findings.

PART B:

Suppose that you are a portfolio manager holding a basket of 10 shares in your portfolio. The aim of this project is to examine the return characteristics of your stock portfolio.

The asset to be investigated is an equally-weighted portfolio consisting of 10 shares of your choice. Collect the closing daily share prices for the past 10 years from Datastream.
To summarise the dataset you are using:
• Provide the names of the 10 shares you have chosen to hold in your portfolio. Outline any reasoning behind your choice of shares.
• In the Appendix, plot the return time series of your 10 shares and your portfolio returns.

Answer ALL of the following questions:

Question 1. Choose an in-sample period and estimate the best-fit time series model for the mean and variance process for your portfolio returns. Carefully discuss the procedure you have adopted to obtain the best model and interpret your results.

Question 2. Perform out-of-sample forecasting:
o Using the best mean and variance model specifications obtained from Question 1, forecast the portfolio mean and the variance process.
o Explain how you have produced the out-of-sample mean and variance forecasts and what assumptions you have made.
o As an illustration, show mathematically how the forecasts are calculated for a few steps ahead and compare it with the forecasts generated by Eviews.

Question 3. Evaluate the forecast performance of your best mean and variance model against a naïve benchmark model (such as the random walk). Use appropriate forecast evaluation measures to assess the accuracy of your mean and variance forecasts. Interpret the significance of your results from the perspective of a portfolio manager.

Attachment:- Financial Econometrics.rar

Reference no: EM132484180

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