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It is vitally important that the project is done well for a number of reasons. Firstly, it has a large weight in the final degree: Secondly, it can generate substantial complementarities if the project is related to the option that you take, or if you are gaining skills in the practical use of econometric techniques, for example. Thirdly, it can help you get a job if you are able to let potential employers see a well-presented project. These notes provide advice on doing the project. Ignoring this advice may result in you being heavily penalised when the project is marked. If you have access to suitable hardware or software elsewhere you can use your own computers. You cannot use our computers until you have signed the user form. If you use our computers:
DO NOT COPY ANY PROGRAMS ONTO OUR COMPUTERS, YOU MAY BE INTRODUCING A VIRUS WHICH WILL DISRUPT EVERYBODY’S WORK. DO NOT COPY PROGRAMS FROM OUR MACHINES; IT IS ILLEGAL.
The project must be typed, bound according to University Regulations and submitted by 30 May. It should use double spacing. The maximum number of words is 5000. Timetable It is important to remember that the deadline of 30 May cannot be altered. Anyone who hands in their project after this date will get zero marks for it. You should therefore think of the project as an exercise in time management, as well as an exercise both in applying the tools of economic analysis and in report writing. You should choose your topic as soon as possible and submit a one-page synopsis to the Financial Economics Department Office by 30 November at the latest. On the basis of your proposal, you will be allocated a Project Tutor, and you should arrange to meet him/her immediately and thereafter on a regular basis. Topic There are three main types of project: a) theoretical, b) institutional, c) empirical. Theoretical projects apply the tools of economic analysis to solve a theoretical problem in economics. For example, finance theory tends to use measures of risk whereas the world is really characterised by uncertainty: you might like to work on developing meaningful measures of uncertainty. However, theoretical projects are probably the most difficult to do, and the results cannot be guaranteed beforehand.
An alternative is to do an institutional project. This involves taking a particular set of financial institutions or markets, analysing and providing a critique of their structure, and then possibly making policy recommendations to improve that structure in the light of your analysis and critique. For example, you might wish to examine the trend towards a universal banking system, and investigate whether there is still a role for specialist financial intermediaries. Or, you might wish to analyse the practical problems involved in running the European Central Bank. Or, you might wish to analyse pension funding arrangements in Europe. Or you might wish to examine the reasons why certain financial futures contracts are introduced, but fail to survive. Institutional projects require a deep understanding of the particular institutions being analysed and have to be particularly well-written if they are going to avoid being turgid to read. Most students will tend to do an empirical project. This involves taking an existing theory or theoretical model, collecting some data (typically time series data), and using econometric techniques on the data to test the theory or to estimate the theoretical model. For example, you might wish to test the theory that money causes inflation or test whether covered interest parity holds or whether the Fisher equation holds. Or you might wish to estimate the parameters of a consumption function or a money demand function. You can choose any topic in the fields of economics or finance. Useful sources of topics are: an interesting data set; your job; your option; published articles; or members of staff. Part-time students often do work-related topics, non-UK students often choose topics using data from their own country. Avoid choosing a project that is too ambitious, estimating a couple of relationships is good enough. We are not interested in whether you get good or bad results, we want to see how you go about analysing a problem. You can make a valuable project out of replicating a published paper, and applying a model in the literature to the same data (then attempting to improve on their model), or to data from a different country, industry or time period.
DO NOT BEGIN YOUR TOPIC BEFORE YOU KNOW THAT YOU CAN GET ALL THE INFORMATION AND DATA THAT YOU WILL NEED TO COMPLETE IT. READ PUBLISHED ECONOMICS AND FINANCE PAPERS AND TRY TO COPY THEIR STYLE.
For examples of theoretical papers, look at the Journal of Finance, the Journal of Financial Economics, and the Journal of Economic Theory. For examples of institutional papers, look at the various bank reviews (Lloyds, National Westminster) and the National Institute Economic Review. For examples of empirical papers, look at Applied Economics, Applied Financial Economics, and the Economic Journal. If you want to find a paper on a particular topic look at the Journal of Economic Literature which classifies all books and published papers by subject.
DO NOT SPEND TOO LONG OVER CHOOSING A TOPIC. AND ONCE YOU HAVE CHOSEN ONE AND HAVE COLLECTED THE DATA, DO NOT BE TEMPTED TO SWITCH: IT WILL PROBABLY BE TOO LATE – REMEMBER THE DEADLINE!
Examples of previous topic titles are: • • • • • • • • • • • • • • • • • • • • • • • • • • • • • An analysis of the top four mergers and acquisitions in 1985 Demographic changes and how they affect house prices and owner occupation Testing the Black-Scholes Model in the LDC options market The Argentine economic turnaround 1989 – 1993 Theoretical valuations applied to the eurosterling convertible bond market Unemployment and owner occupation: is there a link? How foreign exchange markets react to economic data on release day The yield curve and consumption growth Latin American emerging stock markets: integration vs segmentation in a global framework The effect of international capital flows on saving, investment and the price of capital in the UK Forecasting the Baltic Freight Index Arbitrage opportunities in efficient markets Inside knowledge and directors’ transactions A comparison of technical trading rule profitability in the foreign exchange market with other financial markets The impact of capital adequacy requirements on banking systems world-wide The effects of exchange rate variability on output and employment Management buyouts and the return on capital Equity performance and changes in exchange rate systems The Basic State Retirement Pension Scheme and its ability to withstand structural demographic change An econometric study of stock price behaviour Aspects of the UK money market that may have to change as European Monetary Union evolves Housing inheritance The “Big Bang” and UK stock market efficiency. The relationship between price and volume for a financial asset. Credit restrictions and consumer spending: is evidence consistent with an unrestricted market? Theoretical/empirical model of corporate real and financial decisions. Testing CAPM and ARBM. Analysis of pension funding arrangements in Europe. Role and significance of professional bodies in City (e.g. Institutional Shareholders Committee, National Association of Pension Funds, Association of British Insurers, British Merchant Bankers Association, Fund Managers Association, Building Societies Association, Association of Unit Trusts, Association of Investment Trusts, etc.). Analysis of effectiveness of mergers between merchant banks, broking houses and jobbing firms to create new types of investment banks post-Big Bang. Analysis of debt-equity swaps in LDCs. Exchange rate and the stock market. Monetary policy and the stock market. Inflation and the stock market. Investment and the stock market.
• • • • • •
Data Finding the appropriate data can be the most difficult part. Make it your first priority and check that the data is available before deciding on a topic. You can use time-series data, cross-section data (observations at one moment in time over countries, regions, families, etc.), or panel data which combines time-series and cross-section. Make sure you have enough observations and variables. The sample size plays an important role in the precision of your results and what you can do. Aim to have at least 30 observations for annual or cross-section data; more for quarterly or monthly data. Unless you have experience of large data sets or help in handling them, do not go much above 100 observations. If you use time-series data, you must (unless you have the express permission of your supervisor) use the most up-to-date data available, i.e. up to at least quarter 3 of the previous year. Sources The best single source for UK economic data is the Office of National Statistics (ONS). Its main publication is Economic Trends Annual Supplement. It is published about January each year. Other similar sources are The Blue Book (National Income and Expenditure), The Annual Abstract of Statistics, Financial Statistics, Labour Market Trends and the Family Expenditure Survey. The best sources of on-line financial data are Datastream and Reuters. For international data the best sources are: World Bank publications, such as World Development Report, OECD Main Economic Indicators, and IMF International Financial Statistics which give internationally comparable data. For the USA, the Economic Report of the President has an appendix which gives the main macro data. Getting to know your data Make sure you know the exact definition of the data and what they are measuring. Terms like income or prices are not acceptable. Are the variables in current or constant prices? What is their base year? What is their coverage (Net or Gross, National or Domestic, UK or GB)? Are they seasonally adjusted? Have the definitions changed over the sample period? You may have to adjust your data in various ways to deal with missing observations, to splice series on different bases, or to convert them into different currencies. Published data are not infallible, look for possible mistakes in the data. You should know something about the relevant history and institutions, such as important events like strikes, wars or changes of government. Once you have loaded your data onto the computer, you should conduct a descriptive analysis. Print the data and check carefully for typing errors. Plot the data and note the distinctive features such as trends, temporal dependencies, seasonality, unusual observations etc. Calculate means and variances and correlations between your variables and over time. Repeat this process after you transform the data by taking logarithms, growth rates or ratios. Growth rates or ratios (the savings ratio, the velocity of circulation, the share of profits) are often more informative because they are not dominated by trends. Very many economic models use logarithmic
transformations because the change in the logarithm is approximately equal to the growth rate; variances are more likely to be constant; coefficients can be interpreted as elasticities; and many interesting economic hypotheses can be expressed as linear restrictions in logarithmic models. As part of the data description for time-series, you should check the order of integration of the variables and whether they are cointegrated. Where there are a number of possible measures for a variable use all of them and try and decide which is best. This can make a good question to raise in your project, e.g. do wages respond more to the Consumer Price Index or the Retail Price Index? Do not decide a priori, rather test and find out. KEEP AT LEAST TWO BACK-UP COPIES OF YOUR DATA, ON SEPARATE DISKS, STORED SEPARATELY. BACK UP REGULARLY. You can lose your data in lots of different ways (one past student’s 2 year old daughter took apart every disk in the box). It is a lot of work typing in the data again, try to avoid the extra work. Analysis Conduct your research with the final written project in mind. Make sure you can answer all the questions posed in the next section. Write fairly detailed notes of what you are doing and what your results are as you go along. It is very easy to forget what you did and be left with a vast pile of incomprehensible print-out. Try and organise your investigation around a few central questions. This will allow you to structure your specification search. Writing Up Leave plenty of time for writing up, since this tends to be the weakest link. People who can do all the rest often fail to describe what they have done and what it all means. The project must be typed and bound according to University regulations. We will give you precise instructions to follow later in the year. Do not submit your computer print-outs. You should process and digest the relevant information from them, and report it in your project. Do not just transcribe the results of performing dozens of regressions. Try to structure the interpretation of the results: pose questions and explain how the regressions provide answers to them. As you write the results up you are almost certain to think of something else you need to do. So start writing up early. You should tell us about all the things we do not know and need to know in order to understand what you have done. Do not copy out large chunks of econometrics text books, we know most of that, just give a reference. ATTEMPT THE IMPOSSIBLE: TRY TO MAKE IT LIVELY AND INTERESTING. The MAXIMUM LENGTH IS 5,000 WORDS of text, i.e. excluding tables. We penalise excessive length, so be clear on exactly what you want to say and say it briefly and clearly. We strongly recommend that you write the project in the following form. The length needed for each section will differ from project to project.
We will provide you with an official front page for your project: all you have to do here is type in your name and project title. B Declaration You must include the following signed declaration immediately after the front page: “This project is submitted under University of London regulations as part of the examination requirements for the BSc(Econ) Degree in Financial Economics. Any quotation or excerpt from the published or unpublished work of other persons is explicitly indicated and in each such instance a full reference to the source of such work is given. I have read and understood the requirements of the Birkbeck College Examinations Instructions to Candidates, including the relevant University of London regulations on Examination Tests, and in accordance with those requirements submit this work as my own.” C D First page Introduction This should contain a short abstract of 100 words. Don’t just jump in at the middle. Introduce the subject, give some background information and refer to any relevant literature. Then you should explain the questions you are going to try and answer or the problems you are going to solve, and explain why these are interesting. E Theory Set out the economic theory and use it to specify a model. Discuss the economic interpretation of the parameters (elasticities, marginal propensities, long and short run effects, etc.). Set out any a priori expectations about the signs and magnitudes of the parameters. Set out any hypotheses to be tested: constant returns to scale, homogeneity, unit elasticities, parameters that should lie between zero and unity, etc. Note any identities linking the data. Discuss any identification problems. It is often useful to think of the economic theory as specifying: a long-run equilibrium relationship; an adjustment process; and an expectations-formation process. Discuss each of these separately. Think about the time-series structure of the data. You will get into trouble if you try to explain a stationary variable just by a single highly trended variable. Check that orders of integration match. Remember that some theories imply that variables should follow random walks, so the basic theoretical model is that the change in the variable is a “white noise” error, unpredictable from earlier information. F Data Discuss the sources for the data, the exact definitions of variables; the sample used for estimation; the correspondence of the data with the relevant theoretical concepts; the possible measurement errors, etc. Describe the main features of the series, with graphs if necessary, and point out any peculiarities or outliers. Ask whether the series are stationary in levels or first differences.
We give credit for data collection. If you have had to do a lot of work to develop a new or unusual data set, make sure that you describe what you have done, so we can give you the credit (and identify any mistakes). PRESENT THE DATA IN AN APPENDIX. G The Statistical Model Use the theoretical model and the probabilistic structure of the data to choose a statistical model; linear regression model; dynamic linear regression; multivariate regression; vector autoregression; simultaneous equations model; etc. Discuss your choice of statistical model in terms of the assumptions it involves. You need to convince the reader that you have made an appropriate choice. It pays to start by trying both a simple model using just levels of the main variables (which you may want to treat as a cointegrating regression) and a fairly general model with lots of lags and variables. H Estimation and Misspecification Testing Estimate the statistical parameters of interest, and test the validity of the assumptions underlying the statistical model (absence of serial correlation, linear functional form, homoscedasticity, normality, constant parameters, etc.). If any of the assumptions are rejected you should respecify the model and try again. With luck, you should get a “well-defined statistical model” that passes all the misspecification tests. Report the results briefly. How you lay out and present the results is very important. Try to copy the style of articles in the literature. I Specification Testing and Interpretation When you have a “well-defined statistical model”, then you can proceed to reparameterise/restrict the statistical model in order to construct an empirical econometric model. This involves testing economic hypotheses (e.g. homogeneity in prices, constant returns to scale); calculating the economic parameters of interest (e.g. long-run solutions, elasticities); and interpreting the adjustment process (e.g. error correction, common factors). Finally, evaluate your chosen empirical econometric model in the light of the original theoretical model, the estimated theoretical parameters of interest, and how your results compare with other published estimates. If you were unable to find a well-defined statistical model, you should go through this stage anyway, but point out that your results may be less reliable, because of the possible misspecification. J Conclusions Explain the significance of your results and how they relate to the original questions or problems posed in the introduction. What is their relevance for practical questions of policy, forecasting, business? Are they consistent with theory and with institutional information? Is the model statistically adequate in representing the data? K References There should be a list of works cited at the end. Remember that we do not expect every project to be publishable or even to get very clear answers. You are evaluated on how you try, not whether you
succeed. Success depends on luck, judgement, and the characteristics of the data. Do not be disheartened by negative results: they may be just as useful as positive ones. We keep your projects in your file and use them for writing references etc. So MAKE A COPY OF YOUR PROJECT FOR YOURSELF BEFORE HANDING IT IN. Many past projects have subsequently been published and we are happy to advise you after the exams on whether your’s can be turned into a publishable piece. Guidelines for Project Supervision on Undergraduate Degrees It is the student’s responsibility to choose the topic of their research project. Students have to fill in a project proposal (before the end of the Christmas term) and it is on the basis of this proposal that they will be allocated a project supervisor. The supervisor who is allocated to a student will be the most appropriate given the proposed topic, but because of obvious constraints involved in matching supervisors and topics, students cannot necessarily expect to get the supervisor of their choice or one who is necessarily an expert in the area of their topic. So students should have a fairly clear idea of what topic they wish to pursue before the very first meeting with their supervisor. Do not forget it is your project, not the supervisor’s! The following guidelines are designed to help students get the most effective use from their relationship with their supervisor: 1. You can have up to five meetings with your supervisor, comprising: (a) A short preliminary meeting of about 10 minutes (you should ensure that you arrange this meeting as early as possible, and certainly before the end of January) (b) Four meetings lasting up to 15 minutes each. 2. During the course of your meetings with your supervisor, you can expect to get the following help or advice on: (a) Project proposal - your supervisor will assess the suitability of the proposed project. (b) Literature search - ideally, you should already have made a search and review of the literature by the time of the first meeting with your supervisor (you can use ECON.LIT in the library to make a literature search). The supervisor should point out any obvious omissions. However, in cases where a student is having trouble in choosing a topic the supervisor might offer suggestions about a relevant topic in the literature. Also in cases where, in the light of discussions with the supervisor, it becomes clear that for whatever reason, the original project proposal is not suitable, the supervisor should offer suggestions as to a more realistic topic and also to the relevant literature. (c) Data collection - the supervisor may be aware of data sources relevant to the project, but it is your responsibility to ensure that any data needed for the project is available or can be collected in reasonable time and at reasonable cost (the College does not pay for any data used on student projects). However, the supervisor should be expected to assess whether the proposed data set is suitable/feasible for the purposes of the project.
(d) Data analysis - you should make yourselves aware of the statistical and econometric software supported by the department and and also their limitations (you can ask the Computer Manager about these). Your supervisor may be aware of other software, but it is your responsibility to ensure that the software you propose to use is suitable/feasible for the project. (e) Presentation - your supervisor should provide general advice on presentation, ordering of sections etc, but you cannot expect help with style, use of English, grammar etc. 3. If your supervisor agrees to take a look at your project before it is handed in, you should allow him/her one week to do so (this should occur in early May at the latest). But, you can only expect to receive comments on the presentation and general cohesion of the project, not on the quality or standard of the project. It is the responsibility of students to develop a good relationship with their supervisor, but if they are having difficulty doing so, they should bring this to the attention of the Programme Director who will attempt to mediate and in exceptional cases change the supervisor. As in other modules of the degree, students can fill in an assessment form concerning the project supervision they have had. Guidelines for Project Assessment on Undergraduate Degrees The fourth-year project has a very significant weight in the final degree classification. Because of this, we wish to ensure that when a project is assessed by us, we are provided with as much information as possible. As part of our efforts to improve our assessment procedures and to provide checks against plagiarism, the following rules apply: 1. 2. Supervisors will monitor and record the work-in-progress of the students that they supervise. A number of students will have their projects orally examined. Students who have not maintained regular contact with their supervisor will be more likely to face an oral examination, but there will be a significant amount of randomness to the selection process. Students are required to submit with their final project, a diskette containing: (a) the text of their project, (b) the data (if any) used in their project, and (c) the regression output (if any) used in their project.
These procedures are designed to ensure that all submitted projects are the genuine work of the student concerned. Furthermore, students should be careful to avoid showing their projects to other students in order to minimise the chance of their projects being submitted as the work of another student registered with a different college, with the possible requirement, at a later date, to prove that the project is indeed their own work.
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