Applied Modelling and Data Analysis Essay Example | Topics and Well Written Essays - 3500 words

Applied Modelling and Data Analysis - Essay Example The aim of this project is therefore to analyse the behaviour of the share price of a given company by finding the relationship between share price inflation and other key market determinants and variables such as market index and Treasury bill interest rate. This means that share price of the company is the dependent variable for the study, while market index and Treasury bill interest rate are the independent variables for the study. The study is conducted with the approach of performing time series that checks for stationarity by applying the formal unit root tests of Augmented Dickey-Fuller (ADF) test. To get a better understanding of the relationship between the dependent variable and independent variables, the researcher will take a step further to estimate time series dynamics through the use of the GARCH family models. Because shares are traded with their derivatives, there is a common discussion in literature of the impact of the introduction of derivatives on volatility. Th rough the GARCH model, the effect of derivatives on the underlying market will also be determined. In pursuant to the achievement of the aim of the study discussed above, the researcher conducted a research that was based on both theoretical background and empirical evidence. The theoretical background of the research was performed mainly by the use of a brief literature review, which forms the second component of the study’s report. Under the literature review, the findings of major studies on stock price behaviour are critiqued by comparing different schools of thoughts against each other. This makes it possible to give the rationale behind various findings from literature. The third component of the study is the econometric methodology, where the researcher presented a detailed analysis of the methodology adopted for the study. Under this section, the market fraction hypothesis and how it was used to test the stationarity of the