Subject Guide-ECON90033 sem1 2020 PDF

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ECON90033 Quantitative Analysis of Finance I SUBJECT GUIDE Semester 1, 2020

Prepared and delivered by Dr. John Shannon [email protected]

Department of Economics Faculty of Business and Economics

Subject Outline Introduction Welcome to Quantitative Analysis of Finance 1. This course introduces both Univariate and Multivariate quantitative techniques used in empirical finance. Students will learn to apply these tools to model, estimate and forecast financial variables such as financial prices and returns. There is a strong focus on model building, estimation techniques, interpretation and evaluation of results, forecasting and forecast evaluation and these concepts and techniques are illustrated using key Finance applications.

Subject Overview and Aims The applications that are examined will involve both the levels and the returns from a variety of asset classes, including stock markets, FX, commodities, and bonds. While the focus is on modelling the conditional means of these values we will also look at how a measure of risk, the conditional variances can be modelled. Students will get the opportunity to learn how to implement these techniques using the EViews statistical software programme. While the course covers the technical aspects of the following techniques and procedures it also looks at how the outcomes are affected by underlying assumptions and how these outcomes will change when assumptions such as Normality are violated: 

Estimation methods used in finance;



ARMA models;



Unit root testing;



GARCH models and volatility modeling;



Forecasting and forecast evaluation



VAR models;



Cointegration and VECM;

The Impact of the Coronavirus COVID-19 on this subject The University of Melbourne recognizes that the issues associated with the Coronavirus COVID-19 will have a major impact on many of our students. While the content of this subject has not been changed the Assessment procedures have been modified so that students who cannot attend lectures and tutorials in person will still be able to achieve a deep understanding of the key techniques and procedures and will not be prevented from achieving grades that are consistent with their abilities.

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Subject Learning Resources Prescribed Reading (Compulsory) The key learning resources are the lecture slides which are available on the LMS before the lecture, the video recordings of the lectures which are available on the LMS the day after the lectures are presented and some recommended readings, which will be available on the LMS. The Textbook which provides the materials for both of the subjects Quantitative Analysis of Finance I (ECON90033) and Quantitative Analysis of Finance II (ECON90010): 

Hurn, S., Martin, V., Phillips, P & Yu, J. (2020), Financial Econometric Modelling Oxford University Press, (HMPY)

Reference Books (Optional) There are several useful reference books that cover the materials covered in the lectures and tutorials. Please note, if you can follow the lecture slides, cover the textbook references and work through the tutorials, then that should be sufficient to do very well in the subject. However, if you feel like you need a reference book to supplement and help you understand these materials then you can look at the following books. BASIC Reference: 

Brooks, C. (2014) Introductory Econometrics for Finance. 4th ed. Cambridge, United Kingdom: Cambridge University Press. (B)

ADVANCED References: 

Linton,O. (2019) Financial Econometrics. Cambridge, England & New York: Cambridge University Press. (L)



Tsay,R.S. (2010) Analysis of Financial Time Series 3rd edt.. New Jersey: John Wiley Interscience. (T)

BACKGROUND Reading: 

Stock, J.H. and Watson, M.W. (2011) Introduction to Econometrics. 3rd Edition. Boston, MA: Addison-Wesley. [UniM Giblin Eunson High Use, Call No. 330.015195 STOC]



Hill, R.C., Griffiths, W.E. and Lim, G. C. (2011) Principles of Econometrics. 4th Edition. Hoboken, NJ: Wiley. [UniM Giblin Eunson High Use, Call No. 330.015195 HILL]

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Learning Outcomes Learning Outcomes and Generic Skills Studying this subject will enable you to achieve the following Learning Outcomes and to acquire the following Generic Skills as set out in the University of Melbourne Handbook. https://handbook.unimelb.edu.au/2020/subjects/econ90033/print 2/7 Intended Learning Outcomes from successfully completing this subject: Apply quantitative tools to model, estimate and forecast financial variables Analyse the statistical properties of financial prices and returns Evaluate models of risk based on the Capital Asset Pricing Model and variants assuming non-normal return processes Analyse recent advances in unit root and cointegration methods in modeling the term structure of interest rates and asset price bubbles Describe the strengths and limitations of alternative quantitative methods by reproducing existing results using computer skills and mathematical modelling techniques, in conjunction with a range of financial data sets Perform sensitivity analyses on proposed models, which should include the application of alternative distributional specifications to model risk Generic Skills that should be improved by successfully completing this subject: Evaluation of ideas, views and evidence Synthesis of ideas, views and evidence Strategic thinking Critical thinking Application of theory to economic policy and business decision making Accessing economic and other information Summary and interpretation of information Application of windows software Using computer programs Statistical reasoning Problem solving skills Collaborative learning and teamwork Negotiation and bargaining Written communication Oral Communication

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Eligibility and Requirements To view the eligibility and requirements, including prerequisites, corequisites, recommended background knowledge and core participation requirements for this subject, please see the University Handbook: https://handbook.unimelb.edu.au/2018/subjects/econ90033/eligibility-and-requirements The key requirement is to have successfully completed the subject ECON20003 Quantitative Methods 2 or subjects which cover the topics in this subject.

Academic Staff Contact Details Subject Coordinator/Lecturer Contact Details Your coordinator/lecturer for ECON90033 is Doctor John Shannon Email: [email protected] Consultation Hours: Monday 2:00pm-4:00pm Room: 345 FBE Building, 111 Barry Street John will usually stay after the weekly seminars for as long as is required to answer any questions you may have. He will usually respond to any email inquiries within 2 days.

Tutor Contact Details There are three tutors for the subject. The tutorials start in week 2 and the tutor will hold weekly tutorials. The tutor’s consultation times start from week 3. The tutor will tell you the times and the locations for their consultations. The tutors and their email contact details are shown below: Amila Karic

[email protected]

Shuang Liu

[email protected]

Melvern Leung

[email protected]

Email Protocol Please note that we are only able to respond to student emails coming from a University email address. Please do not use personal email addresses such as Yahoo, Hotmail or even business email addresses. Emails from non-University email addresses may be filtered by the University’s spam filter, which means that we may not receive your email. All correspondence relating to this subject will only be sent to your University email address. Note that you must first activate your University email address before you can send or receive emails at that address. You can activate your email account at this link: http://accounts.unimelb.edu.au/. 5

While academic staff endeavor to address queries received via email, it is more appropriate to resolve substantive questions during lectures and tutorials and during normal consultation hours. With this in mind, we encourage students to attend all lectures and tutorials and to familiarise themselves with the consultation hours offered by the lecturer and tutors in this subject.

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Lectures Lecture Time Tuesday 11:00 am-1:00 pm in Kwong Lee Dow Theatre also called Room 230.

Lecture Participation Requirements Students are expected to attend all lectures and to keep up-to-date with the work requirements of the course. The estimated total time commitment is 170 hours.

Lecture Schedule and Textbook (HMPY) References Topics

HMPY Chs

Weeks

Dates

1

Properties of Financial Data

1&2

1

3-Mar

2

Linear Regression in Finance

3

2&3

10,17-Mar

3

Dynamics in the Mean: ARMA Models

4

3&4

17,24-Mar

4

Stationarity and Unit Root Testing

5

4&5

24,31-Mar

5

Forecasting and Forecast Evaluation

7

5

31-Mar

6

Volatility Modelling: GARCH Models

13

6&7

7,21-Apr

7

4

8

28-Apr

8

VAR Models (1): Concept and Specification VAR Models (2): Interpretation

4

9

5-May

9

Introduction to Cointegration

6

10

12-May

10

Cointegration and VECM

6

11

19-May

12

26-May

Review and Exam Information

There are 10 Topics in the subject but the lectures for two longer topics 2. Linear Regression in Finance and 6. Volatility Modelling: GARCH Models will take more than 2 hours while the lecture for the shorter topic 5. Forecasting and Forecast Evaluation will take less than 2 hours. By looking at the video captures on the LMS you will always be able to see what materials have been covered in the lecture for that week. Make sure that you can access the relevant materials when you attend any lecture.

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Lecture Slides Lecture slides will be placed on the LMS page for this subject at least a week prior to each lecture. The lecture slides will be located under the heading “Lectures”

Using Lecture Capture Audio and video recordings of lectures delivered in this subject will be made available for review usually in less than 1 hour after the lecture is delivered. The lectures and their recordings are designed to help you to gain a deeper understanding of the core concepts in the subject. This should assist you to work more efficiently when completing assignments and when preparing for examinations.. You can access recorded lectures by clicking on the Lecture Recordings (or similar) menu item on the LMS page for this subject. Please note that recordings are not a substitute for attendance; rather they are designed for revision. On rare occasions the capture system can fail to record the lecture due to technical reasons. In such cases, the recording will not be made available. In lecture theatres with multiple screens only one screen will be captured, any information projected onto the other screen will not be recorded. The University has recently moved to a new Lecture Capture platform with additional features. Please review the Lecture Capture Student Guides page for more information: https://lms.unimelb.edu.au/support/guides/students/lecture-capture-student-guide

Tutorials Tutorials Students are all expected to attend a 1-hour tutorial each week which covers the work which was covered in the lecture for the previous week. If you are unable to attend tutorials you should attempt the questions and then use the detailed answers to self-correct your work. You will also be provided with extra assistance that will be discussed in the LMS in coming weeks. Tutorials will commence in week 2 of teaching. Students must enrol in a tutorial via the Student Portal. Tutorials are an important component in the course. One of the main objectives of the tutorials is for students to implement and gain intuition for what they learn in the lectures using the EViews software. Students will complete computer-based exercises using EViews software during the tutorials. Tutorial question sheets and data will be available on the LMS prior to when each tutorial occurs. Students are expected to attend and actively participate in all tutorials and to keep up-to-date with the work requirements of the course. Solutions to tutorial problems sets will be made available after the tutorials via the LMS.

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While there are no compulsory Participation Requirements in this subject past experience has shown that the performance of students in this subject is highly correlated with their tutorial participation. Typically in any week over 90% of students will attend a tutorial.

Private Tutoring Services Faculty has become increasingly concerned about the existence of a number of private tutoring services operating in Melbourne that heavily target University of Melbourne students enrolled in FBE subjects. Students are urged to show caution and exercise their judgement if they are considering using any of these services, and to please take note of the following: Any claim by any of these businesses that they have a “special” or “collaborative” or “partnership” style relationship with the University or Faculty is false and misleading. Any claim by a private tutoring service that they are in possession of, or can supply you with, forthcoming University exam or assignment questions or “insider” or “exclusive” information is also false and misleading. The University has no relationship whatsoever with any of these services and takes these claims very seriously as they threaten to damage the University’s reputation and undermine its independence. It is also not appropriate for students to provide course materials (including University curricula, reading materials, exam and assignment questions and answers) to operators of these businesses for the purposes of allowing them to conduct commercial tutoring activities. Doing so may amount to misconduct and will be taken seriously. Those materials contain intellectual property owned or controlled by the University. We encourage you to bring to the attention of Faculty staff any behaviour or activity that is not aligned with University expectations or policy as outlined above.

Assessment Assessment Overview Your assessment for this subject in Semester 1 of 2020 comprises the following: Assessment Task

Individual or Group

Due

Weightin g

Assignment 1,

Either

Monday 5.00 pm, 13th April

15%

Either

Friday 5.00 pm. 22nd May

25%

Individual

Examination Period

60%

Topics 1 to 4, 1500 words Assignment 2, Topics 5 to 8, 2500 words End-of-semester exam

No t e :Suc c e s s f ulc o mpl e t i o noft hi ss ubj e c tr e qui r e sapa s s( 50%)i nt hefina le x am.

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Mid-Semester Exam This semester the mid-semester exam has been replaced with an Assignment so that there will now be two Assignments.

Assignment For this semester there will be two assignments instead of one. Assignment 1 covers Topics 1 to 4 and should be submitted by Monday 5.00 pm, April 13th. The word limit is 1500 words. It is worth 15% of the total marks. Assignment 2 covers Topics 5 to 8 and should be submitted by Friday 5.00 pm, May 15th. The word limit is 2500 words. It is worth 25% of the total marks. Both assignments will involve the use of the EViews software. Students can complete the assignment on their own or in a group of no more than 4 students. Students submitting the assignment as a group should include the names of each student who contributed to the assignment. Assignments submitted as a group will have equal marks allocated to each group member.

Final Exam The final exam will be a 2-hour exam (60% of total marks), to be held during the exam period. It will cover material from the whole semester. The time and venue will be announced towards the end of the semester.

Exam Policy The Faculty requires that you are available for the entire examination period. Supplementary exams will not be provided in cases of absence during the examination period, unless the absence is due to serious illness or other serious circumstances. See the Special Consideration web site for more information: http://students.unimelb.edu.au/admin/special The examination period for this semester starts on Tuesday 9 June 2020.

Calculators in Exams As per university policy, the Casio FX82 is the only calculator permitted in university exams

Assignment Submission Assignment submission is via the LMS Assignment Submission link for all written assignments. Please refer to the Turnitin section of the LMS website via for detailed submission instructions if needed (http://go.unimelb.edu.au/zax6). Please note that you are required to keep a copy of your assignment after it has been submitted as you must be able to produce a copy of your assignment at the request of teaching staff at any time after the submission due date. 10

Late Submission Requests for an assignment extension should be submitted here: http://go.unimelb.edu.au/yh9n Before completing this form, please read the Assignment Extension Guidelines regarding acceptable reasons for requesting an extension. In order to ensure equality for all students, assignments must be completed within specified time limits. Late submissions will attract a marking penalty where approval for late submission has not been given. The maximum permissible extension period is three days. Unauthorised late submissions will incur a penalty of 20% for each day that passes after the stated deadline. Assignments submitted more than three days after the stated deadline will not be accepted.

Special Consideration Students who have been significantly affected by illness or other serious circumstances during the semester may be eligible to apply for Special Consideration. The following website contains detailed information relating to who can apply for Special Consideration and the process for making an application: http://students.unimelb.edu.au/admin/special Plagiarism and Collusion Presenting material from other sources without full acknowledgement (referred to as plagiarism) is heavily penalised. Penalties for plagiarism can include a mark of zero for the piece of assessment or a fail grade for the subject. Plagiarism is the presentation by a student of an assignment identified as his or her own work even though it has been copied in whole or in part from another student’s work, or from any other source (e.g. published books, web-based materials or periodicals), without due acknowledgement in the text. Collusion is the presentation by a student of an assignment as his or her own work when it is, in fact, the result (in whole or in part) of unauthorised collaboration with another person or persons. Both the student presenting the assignment and the student(s) willingly supplying unauthorised material are considered participants in the act of academic misconduct. See http://academichonesty.unimelb.edu.au for more information.

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Other Resources The following resources are provided to assist your learning:

Learning Management System (LMS) The first place that you should go to find su...