Description

INSTRUCTIONS

Please up-load one (and one only) either word or pdf file with both your name and student number clearly printed on the first page. Use a file name that gives your identity. For the excel sections it is ok to take screen shots to show some of your workings then cut and paste into your document. For the maths sections, if you prefer, you can hand write then scan and add to your document.

The data to be used for all, except Question 5, is in the Excel file ECON 1095 Data Sem 2 2020 where you will find monthly international share price indices from 1990 to 2020. Please go to the Reserve Bank of Australia’s website www.rba.gov.au (the source of this data) and update for July and August 2020[1].

QUESTION 1

Although recent events in Hong Kong have created uncertainty, often such things can also provide opportunities for investors. As a first step, an investor considering the Hong Kong share market, examines the long term continuous returns for the Hang Seng. Use Excel’s Data Analysis/Descriptive Statistics to find the Hang Seng monthly returns from start of 1991 until August or September 2020[2].

(a)     Calculate the 95% confidence interval for the monthly returns for the Hang Seng over this period.

(b)     As the investor is concerned about the possibility of negative returns, test to see whether the average monthly returns for the Hang Seng are less than or equal to zero.[3] Making reference to this hypothesis test, briefly discuss whether the investor should be worried about the possibility of negative returns if they invest in the Hong Kong share market. Discuss type 1 and type 2 error and how they may relate to this hypothesis test.

(c)     Test to see whether the monthly returns on the Hang Seng over this period are normally distributed using the Jarque-Bera test. This should be done in Excel, by calculating the Jarque-Bera statistic using the formulas from the notes and Data Analysis/Descriptive Statistics.[4] Using the results of this test, comment on the accuracy of the probabilities calculated in parts (a) and (b) of this question.

(d)     The Hang Seng monthly returns over the sample period are negatively skewed. Explain why this is the case and the implications for investment decisions.

(e)     Using the continuous returns on the Hang Seng, determine whether the rises and falls are independent using a runs test. What are the implications of your findings?

(5 marks)

QUESTION 2

Next the investor would like to look at the long-term relationship between the Hang Seng and the United State S&P 500 (US). Using the same time-period as in QUESTION 1:

(a)                 Examine the connection between the Hang Seng and US using a series of graphs. Please do a few graphs, both as levels and returns and as XY and line (time series) graphs. Does it look as though the Hang Seng and US are dependent or independent? Feel free to re-use graphs you produced in Assignment 1.

(b)                 Calculate correlation coefficients between the Hang Seng and US (data analysis, correlation). Again, do this both for the levels and returns. Please interpret the coefficients and offer a brief explanation for their values.