Background:
As a researcher at the financial economics research department of the Federal Reserve Bank of St. Louis in the United States. You were tasked by your supervisor, George, to investigate the relationship among equity market returns, financial market measures and economic activity indicators. Specifically, you were asked to:
1. Analyse how the Chicago Board Options Exchange (CBOE) SKEW and VIX indices and S&P500 index excess returns can explain ex post Industrial Production Growth in the United States with different explanatory horizon from 1- to 12-month. George suggested that one possible way to analyse the relationship is to use standard long-horizon predictive regressions while accounting for serial correlation issue due to overlapping problem in sampling.
2. Build a correct autoregressive distributed lag model (ARDL) to understand the dynamics between the growth in Capacity Utilization Ratio in the United States and the CBOE VIX index.
Assignment:
Prepare an analysis report on the issues raised above. You are required to:
a) describe the data sources and present relevant statistics including (but not limited to) descriptive statistics, regressions outputs and pre- & post- regression diagnostic tests (50% of total marks);
b) discuss various econometrics issues (for e.g. serial correlation, stationarity of time series data, etc) related to the data you handle (40% of total marks);
c) discuss the limitations of your analysis whenever applicable (5% of total marks); and
d) discuss the implications of your findings with respect to policy recommendation and risk management (5% of total marks).
Hints:
Show clear logic throughout the report. Make sure the way of presentation in the report is clear and easy to understand. Including test results that are irrelevant to the tasks listed above will affect the overall quality of the report.