1 Academic Year: 2020/21 Assessment Period: Spring Module Code: BST264 Assessment Paper Title: Empirical Finance Please read the following information carefully: Release time: 11:00AM UK time – 19/07/21 Exam Duration: 2 hours Upload Allowance Time: 2 hours Submission Deadline: 11:00AM UK time – 20/07/21 Notice to students: This is an “open book” assessment, you may make use of relevant resources if you want to but please bear in mind that the limited time you have to undertake the assessment. The use of calculators is permitted, where appropriate. By submitting your answers, you declare that you: o Worked on your answers only for the duration specified above. o Worked alone in answering the questions and the submission (and all the material contained in it), is entirely your own work. o Have not shared your answers with anyone else. o Understand that deceiving, or attempting to deceive, the examiners by passing off the work of another as your own is plagiarism. o Understand that plagiarising another’s work, or knowingly allowing another student to plagiarise from your work, is against University Regulations and that doing so could result in loss of marks and disciplinary proceedings. The University’s plagiarism detection software will be used to check originality of, and any collusion in, the submitted work. The Business School reserves the right to interview any student if it is suspicious about the content of their work. 2 Structure of Paper: There are 4 pages including these pages. There are 5 questions in total. There are no appendices. The maximum mark for the examination paper is 100% and the mark obtainable for each question is shown in brackets alongside the question. The word guide is 1,000 words per hour OR Answers should be concise. Instructions for completing the examination: Include your Student Number clearly on ALL pages of your submission. Answer any THREE questions. You should either type all your answers in Microsoft Word or handwrite some (or all) of your answer and scan and upload your answers as ONE PDF file. Guidance on how to do this has been provided separately. For any handwritten sections, use blue/black ink and dark pencils, on white plain or lined A4 paper. Typed sections should use 11 or 12-font and Calibri, Arial or Times New Roman are the preferred fonts. All pages should be numbered and in the correct order and orientation. You can and where possible should use in-text references, but you are not expected to provide a full reference list. Make sure you clearly identify which question you are answering before providing your answer. You should note on the top of the first page the start and end times of answering the examination. Write the question numbers answered and ordering of responses on the first page of your answer sheet. Instructions for submitting your examination answers: We advise using Mozilla Firefox to access Learning Central where possible. Please submit your completed submission in Microsoft Word or scanned PDF to the portal in module BST264 in Learning Central. Please ensure that you have entered your Student Number and the module code in the title of your submission to Learning Central. This is VITAL as it is how we can identify your submitted work. Without this we might not be able to grade your work. Please submit your answer script within the 2-hour upload allowance time. If you encounter difficulties with submission, please email CARBS-PGHubQueries@cardiff.ac.uk before the deadline expires and we will look to assist you. Please include your student number in any correspondence. Check the preview of your assessment before confirming submission. You should take a screen print of the green bar confirming submission and keep your email from Learning Central confirming receipt of your submission. 3 Q1. Let tF and 1 e tS + denote the market’s forward exchange rate and the corresponding expected future spot exchange rate. Likewise, let tS and tP denote the current spot rate and the time varying forward risk premium, respectively. Using these variable names (mnemonics) and symbols, answer the following. (a) Clearly explain the hypothesis of forward market efficiency. Illustrate the econometric methods of testing the hypothesis of forward market unbiasedness and explain the inference procedures. Concisely summarize the general findings regarding the unbiasedness hypothesis and the explanations offered for them. (18 Marks) (b) It is widely suggested (hypothesized) that tF covers tP and 1 e tS + . Illustrate the test procedure and inferences that establish this hypothesis and suggest a measure of tP . Critically comment on your measure of tP . (15 Marks) Q2. Succinctly explain and demonstrate how the statistical model of Random Walk (RW) becomes a valuable tool for testing a particular form of the efficient market hypothesis (EMH). Outlining the appropriate form of the RW model for testing the EMH, carefully illustrate how you may employ the Variance Ratio test and the Dickey-Fuller unit root test to examine whether stock prices abide by the prediction of EMH. Critically evaluate the limitations of these tests as well as the associated concept of EMH. (33 Marks) Q3. Assume that you work for the research and analysis department of an investment bank. Your superior believes that stock prices should be lower during the month of July when most Westerners take a break for summer holidays which may potentially lower the trading volume. Your superior further hypothesizes that this holiday effect should be more pronounced in the last fortnight (second half) of July. You are required to produce a concise report on different forms of seasonality (calendar effects) surrounding the stock returns and to illustrate how econometric tests could be performed regarding your superior’s hypothesis. You should explain (i) how to test whether the returns in the month of July are indeed lower than those in other months, and (ii) whether this phenomenon is prominent in the last fortnight of the month of July. Write a concise report addressing these issues and comment on any potential investment strategy. (33 Marks) 4 Q4. Concisely explain and illustrate the method of ‘event study’, highlighting its importance and expounding the procedures of estimation and testing (inference). Use any one event of your choice as an example. Carefully comment how event study could test the Efficient Market Hypothesis. (33 Marks) Q5. (a) Carefully explain the relevance of ARCH/GARCH models in Finance (10 Marks) (b) Explain and illustrate with appropriate models and test procedures the following: (i) the presence or absence of ARCH in stock return (10 Marks), and (ii) potentially asymmetric effects of different types of shocks (news) on conditional return volatility. (13 Marks) END OF EXAM
