Instructions- Due Tuesday, 15^thJuly, 2014. Australia Time 6PM

The excel file AUS_NZ_UK.xls contains the monthly exchange rates against US dollar for Australia, New Zealand and UK. (Note: Transform all series in natural logarithm prior to your analysis). Using Eviews, I need all steps in each process and the outputs.

(a)   

Examine the unit root properties of an individual series.

(b)  

Fit an appropriate ARIMA model for these three indices.

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(c)   

Use Johansen procedure to examine the long-run relationships between these three markets. If they are co-integrated, construct Vector Error Correction Model to establish the equilibrium relationships between these variables. If they are not co-integrated then construct the vector autoregressive model to examine the short-run dynamic linkages between these three variables.

(d)  

Establish the causal linkages between these three financial market using Granger causality test.

(e)   

Use Cholesky decomposition to obtain both impulse response and the variance decomposition functions. Discuss the results.

(f)   

Examine the heterogeneity of residuals for the models that you have estimated in part (b) at 5% level of significance.

(g)  

Construct GARCH and TARCH models to these three markets. Which model would you consider to capture the exchange rate volatility? Why? Discuss the leverage effects of all three markets.

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