Students individually are required to write a 1500 words research project.  For this purpose, a data-set is being provided to...

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Students individually are required to write a 1500 words research project.  For this purpose, a data-set is being provided to them. The research project counts for 30% of their final grade.     

 

 

Project 1

 

For Project 1, you need to use the Excel file Project 1.xlsx. The file has data on house price index, consumer price index, stock price index, short-term and long-term interest rate (in percentage terms) along with inflation for sixteen OECD countries. The data-set has 100 quarterly observations from 1981:q1 to 2005:q4. You need to choose one of the countries from the set of sixteen countries in the data-set. Your choice of country should not match that of any other student who is enrolled in the course.  For example, if one of you is working with Australia, then none of the others can work with Australia. Given the data-set, you need to answer the following:

 

a) You need to take the natural logarithm of all the variables except the interest rate. Then perform the Augmented Dickey-Fuller unit root test both on levelsand first differences of the variables, with an appropriate lag length as selected by the Akaike information criterion, starting with a maximum laglength of nine. Comment on your findings. 

 

b) You need to build a Vector Autoregressive (VAR) model using the following variables: first difference of house price, stock price, interest rate differential (short-term – long-term), and inflation. Please note that you are working with the natural logarithm of house price and stock price. Use either the Akaike or Schwarz Bayesian information criterion to select the appropriate lag length for your VAR model. 

 

c) Given the choice of your VAR model in part b), compute an impulse response and variance decomposition for 16 quarters and comment on your findings. From the estimated model, can you comment on the direction of Granger causality? 

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