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ECONOMETRICS
ECONOMICS 9505A-001
Department of Economics
Western University
John Knight September, 2014
Prof. Knight
Office: SSC 4029
Phone: 519 661-3489
Office Hours: TBA
Graduate Enquires: 519 661-3505
Classes: M,W: TH 4185: 1:00-2:30 pm
Course Objectives
This is a basic course dealing with the necessary and appropriate econometric techniques for the
analysis of financial data. As most financial data is of a time series nature there will be a major
emphasis on the estimation and testing of various time series models. While the estimation and
testing in linear regression will be assumed as will basic matrix algebra, we will briefly review
this area of econometrics.
Learning Outcomes
Students will learn the necessary econometric techniques to analyze financial data, estimate
financial models and test financial theories. From this course they will acquire the necessary
econometric skills to work in various aspects of the financial industry including asset
management and risk assessment.
The course will consist of approximately six two week blocks as follows:
1. Financial Data:
stylized facts, Normality, holding periods, returns- arithmetic and geometric, etc.

2. Time Series Analysis:
Linear time series: AR, MA, ARMA models, difference stationary and trend stationary,
unit roots and cointegration. Vector processes, VAR, random walks and Brownian
motion.

3. Volatility:
ARCH, GARCH and Stochastic volatility (SV) models, realized volatility

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4. Forecasting:
Using ARMA models, volatility, forecast evaluation

5. Linear factor models:
Time-series vs cross-section. Principal components, factor analysis

6. Capital Asset Pricing Model:
Portfolio theory and distributions
If time permits we may be able to discuss other topics such as Value-at-Risk (VaR), event
studies, high frequency data, continuous time finance and derivative pricing.
While there is no book which has all we want or need, the book by Ruey S. Tsay: Analysis of
Financial Time Series is a good book, albeit expensive and it covers many of the topics. Another
relevant book is that by Campbell, Lo and MacKinlay: The Econometrics of Financial Markets.
While this book is a bit old it does introduce the reader to many aspects of financial markets.
Both books are good reference books and could be purchased if funds allow.
The assessment in the course will be a combination of homework assignments, a small group
applied paper and a final exam with the following breakdown:
Assessment
Best four of five homeworks 40%
Small group applied paper 30%
Final exam 30%

The class with be asked to form themselves into 6 groups of 3 for the small group applied paper.
These groups must be approved by the third week of term. Each group must choose a topic,
collect data and estimate and test their hypothesis. The papers will be presented in the last week
of term and handed in shortly after.

Both the homework and the term paper will require the use of some econometric package. Since
the emphasis is on the interpretation of the results and not on the programming, students may use
whatever package they wish. I will however, for some of the time series assignments, give
detailed commands for gretl, a free downloadable package.

Policy on Academic Offences
Scholastic offences are taken seriously and students are directed to read the appropriate policy,
specifically, the definition of what constitutes a Scholastic Offence, at the following Web site:
http://www.uwo.ca/univsec/handbook/appeals/scholastic_discipline_grad.pdf Academic
Handbook, Exam, Course Outlines Page 4 Issued: 2011 02
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Statement on Mental Health
If you or someone you know is experiencing distress, there are several resources here at Western
to assist you.
Please visit http://www.uwo.ca/uwocom/mentalhealth/ for more information on these resources
and on mental health.



PolicyonAcademicOffences:

Scholasticoffencesaretakenseriouslyandstudentsaredirectedtoreadtheappropriatepolicy,
specifically, the definition of what constitutes a Scholastic Offence, at the following Web site:
http://www.uwo.ca/univsec/handbook/appeals/scholastic_discipline_grad.pdf Academic
Handbook,Exam,CourseOutlinesPage4Issued:201102

All required papers may be subject to submission for textual similarity review to the
commercial plagiarismdetection software under license to the University for the detection of
plagiarism.Allpaperssubmittedforsuchcheckingwillbeincludedassourcedocumentsinthe
reference database for the purpose of detecting plagiarism of papers subsequently submitted
tothesystem.Useoftheserviceissubjecttothelicensingagreement,currentlybetweenThe
UniversityofWesternOntarioandTurnitin.com(http://www.turnitin.com).