Question 1 – What is the relationship between the United States and Australian stock markets?

For this question you will try and determine what relationship, in any, exists between these markets and develop a model which describes it, or alternatively you model may show no relationship exists.

• On the sheet called Quarterly in the data file assignment 2015s2.xls there is quarterly data on the Australian-US dollar exchange rate, the Dow-Jones Industrial Index and the Australian All Ordinaries Index for the past 30 years. The data has been sourced from Thompson Reuters DataStream.

Choose what you believe should be the dependant variable and what the explanatory variable(s). Briefly justify your answer.

• Using your choice of variables, design and estimate a model which best describes the relationship between the United States and Australian markets. Your model should be free of error problems as far as possible.

• Evaluate your model, discussing what sort of relationship exists, if any. You should also comment of the reliability of your results.

Question 2 – What is the impact of volatility in the US market on the Australian market?

For this question you will try and determine what relationship, in any, exists between the volatility in these markets and develop a model which describes it, or alternatively you model may show no relationship exists.

• On the sheet called Daily in the data file assignment spring 2012.xls there is daily data on the Australian-US dollar exchange rate, the Dow-Jones Industrial Index and the Australian All Ordinaries Index for the past 5 years. To answer this question you may need to estimate more than one equation. Write down all the equations you intend to use in your model and briefly explain their purpose. You should also state what data transformations you are using and what their purpose is.

• Using your choice of equations, estimate a model which best describes the relationship between the volatility of United States and Australian markets. Your model should be free of error problems as far as possible.

• Evaluate your model, discussing what sort of relationship exists, if any. You should also comment of the reliability of your results.

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