The causal relationships between finance and macro variables,

Examine the causal relationships between finance and macro variables, as follows. For a
country of your choice, download data for the period from January 2000 until December 2021
on the following variables: stock market index, inflation rate, output (Industrial Production),
and interest rates. Use these data to study the relationships between stock market index,
inflation rate, output (Industrial Production), and interest rates. To do so, you need to answer
the following questions:
(i) [10 marks] Compute and discuss the descriptive statistics of your time series (in levels and
logs). Plot the series and describe patterns.
(ii) [10 marks] Report and comment on the ACF/PACF functions of the stock market index,
the inflation rate, output, and interest rate and each of their first log-differences.
(iii) [20 marks] Use appropriate Dickey–Fuller tests to test if the above four time series and
their first log-differences are non-stationary (have a unit root) or not. Explain the test
procedure, report the test statistics and the appropriate critical values (at 5% significance level)
and discuss the results.
(iv) [20 marks] Test for cointegration among the four variables using the Johansen test.
Explain the test procedure, report the test statistics and the appropriate critical values (at 5%
significance level). How many macro variables are cointegrated with stock market price?
Discuss the results.
(v) [30 marks] If you have found one or more cointegrating relations, estimate the long-run
causal relationships (i.e., the cointegrating relations) and the Vector Error Correction Model.
Otherwise, use the Box-Jenkins procedure to estimate a VAR model for the appropriately
transformed (detrended or differenced) variables. Report the results of Granger causality and
the impulse response functions. Which macro variables affect stock market prices? Discuss
the results.
(vi) [10 marks] Cite three published papers on the relationship between the stock market index
and the above macro variables and discuss/compare your results to those reported in those
three papers

Sample Solution