Posted: September 16th, 2015
In this Case Study, you will look at modelling the Australian dollar vis-á-vis the US dollar exchange rate, using a conventional monetary model. The data you will use is in the file called “The Monetary Model.xls”. This contains the following data: ‘S(AUD/USD)’ , which is the Australian dollar per US dollar exchange rate; ‘Aust. MS’ , which is the level of the Australian money supply; ‘US MS’ , which is the level of the US money supply; ‘Aust. GDP’ , which is a measure of Australian gross domestic product (GDP); ‘US GDP’ , which is a measure of US gross domestic product (GDP); ‘Aust. IR’ , which is a measure of short-term Australian interest rates, and ‘US IR’ , which is a measure of short-term US interest rates. Data on these variables were collected from the IMF’s International Financial Statistics database, and from the Reserve Bank of Australia’s website.
To begin the empirical analysis, make sure you take the natural logarithm of S(AUD/USD), Aust. MS, US MS, Aust. GDP, and US GDP. Leave the interest rate variables, Aust. IR and US IR, in their raw form. Also, use a level of significance of a = 0.05 for all tests in this study.
In this Case Study, you will be looking at the effect of the 2010 Federal Election on the Australian stock market. In the file called “2013 Federal Election.xls”, there is daily data from the 1st of January 2013 until the 31st of December 2013, on the Australian All Ordinaries index and the MSCI world index. You will be looking at two important dates: the day the stock market opened after the election was called, that being the 31st of January 2013, and the day the market opened after Tony Abbott’s election win, which was the 16th of September, 2013.
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CASE STUDY ONE – continued
In this section, you will estimate a simple linear regression model to fit the exchange rate. From Assignment One, choose the input variable that has the strongest correlation with the exchange rate that you believe will produce a good model (this is the variable that we called “PREDICTOR”).
Following on from Assignment One, use the same data set and a level of significance of a = 0.05 for all tests in this study.
In the next stage of this study, you will estimate betas for the Australian stock market vis-á-visthe world using the data in the file called, “2013 Federal Election.xls”. You will need the returns you calculated from a previous tutorial. You will also use the three sub-periods you used before, that is, the period before the election was called, the period during the election campaign, and the period after the election result. In this analysis, you will treat Australia as the share and the world as the market
(a) Draw scatter plots of the three pairs of returns you will use for estimating the market models.
(b) For the three sets of returns in each of the sub-periods find the betas using the Market model
Here the dependent variable is the ‘raw’ or ‘actual returns’ () for Australia and the independent variable is the ‘actual market returns’ (). Once you have estimated these betas use the ‘F’ statistic and the value of R2 to evaluate these estimated models.
(c) For each of the sub-periods, test to see whether Australia is passive or neutral using a = 0.05. That is, test whether .
(d) For the first sub-period, estimate the Scholes-Williams Beta and Dimson’s Beta. Do you think you need to use this sort of adjustment here?
(e) Write some brief notes, in point form, describing your results for Case Study Two. Be sure to report any conclusions that you have made, and submit these. You will use them in a later tutorial when you write your final report.
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