Applied Statistics for Finance and Economics Project report Coursework

Applied Statistics for Finance and Economics Project report - Coursework ExampleSince in this selective information we are focused on 2002 to 2006 we see that the seasonal and the cyclic component are present. We take a era plot of the returns data of home base furnishers to investigate if the data exhibit trend in this case.From the above trend we can see that in that respect is linear trend in the returns of the home furnishers. To forfend trend to make the returns data stationary, we take the differencing of lag 1 and observe the progress the remains. The time plot of the returns also shows that the return data exhibit trend. therefore from the above analysis of the returns and return squared, the returns can be predicted and has a very high predictive power while the return squared has very broken predictive power.Broadly speaking, a time series is said to be stationary if there is no systematic change in the mean (no trend). If there is systematic change in variance and is strictly periodic variations (seasonal and cyclic component) are removed. Most of probability theory of time series analysis is have-to doe with with stationary time series and for this reason time series analysis requires one to change a non-stationary time series to a stationary time series analysis so as to use it. In this study we plot the variables and test their stationary using a particular variation of whole root test- the Augmented Dickey-Fuller test. We then difference the time series of return to make the series stationary.After differencing the return data we can observe that the data is stationary. This can be clearly seen in the time series plot of the differenced data at lag. The plot of differenced data of returns below shows that the data is stationary afterwards differencing it once.The pair trading is a common thing in the trading market. Literature on pair trading, market efficiency and return volatility demeanor is plenty for a developed stock market. The st udy involves pair trading using the