Post-Graduate Diploma in Management

Course: Financial Econometrics

Pre-requisite: Basic statistics and Two variable OLS

Faculty:
Course Description
This is an introductory course aimed at emphasizing the difference in nature of time-series
data and cross-section data (which students have done in a previous course). Basic statistics
will be used throughout the course to develop the theory of financial econometrics which
will then be applied to financial data from NSE, RBI etc. The course will begin by
discussing the BLUE property and asking what happens to the OLS parameter when the
Gauss-Markov assumptions do not hold? Also, how to address issues such as
heteroscedasticity and autocorrelation will be covered in the first part of the course.
In the second part, basics of time-series analysis will be covered. We will restrict ourselves
to univariate linear time-series in this course. We will cover basic concepts such as
random walk, stationarity, conditions for a process to be stationary. Forecasting
applications using ARMA, ARCH/GARCH etc. will be demonstrated. To get hands on
exposure, exercises for which datasets have been provided by Prof. Wooldridge in his
famous book `Introductory Econometrics’ will be solved in R. Students will get hands-on
experience of analyzing financial time-series by doing a group project in R.
Learning Objectives
The board objective of this course are:
• BLUE property of OLS
• Understand the nature of time-series data
• Random walk and Unit root process
• Characteristics of financial time-series
• Linear time-series theory and applications
• Forecasting using ARMA
• Volatility forecasting models such as ARCH/GARCH etc.
Pedagogy
An array of pedagogical methods is utilized, including board demonstrations, statistical
software R & team projects. The lectures will not provide an exhaustive coverage of all
topics. For continuity and easier grasp during the class, prior to each class, students are
expected to read the textbook provided and any additional assigned readings. Students will
also be made familiar with publicly available data sources which they will use to test
hypothesis for the Project.
You are encouraged to ask questions and to be an active participant in class. You are
expected to attend class regularly and to come to class on time. Total 16 sessions of 1 hr
15 minutes each would be conducted. Students are encouraged to interact with the faculty
during the entire duration of course delivery.
Alignment of evaluation process with Learning Outcomes
The course will aim at achieving the above learning outcomes in alignment with the
objectives of the PGDM program at IMT, especially the following objectives:
Specific Assessment Intended learning objectives to be assessed
Method Weight a b c d e f g
Project 35% √ √
Class participation 15% √ √ √ √ √ √ √
End Term 50% √ √ √ √ √ √ √
Notes:
a. BLUE property of OLS
b. Understand the nature of time-series data
c. Random walk and Unit root process
d. Characteristics of financial time-series
e. Linear time-series theory and applications
f. Forecasting using ARMA
g. Volatility forecasting models such as ARCH/GARCH etc.
Evaluation
Students will be evaluated on the basis of group projects, class participation, and end-
term exam. The weightage given to each of these units is listed below:
• Class Participation 15%
• Team project 35%
• End Term Exam 50%

Learning Outcomes
• Appreciate the difference between cross-section and time-series data
• To understand the basic principles of Financial Econometrics
• Analyzing financial time-series in R
Reference Book
‘Introductory Econometrics: A Modern Approach’ by Jeffrey Wooldridge
 Course Schedule
Session Topic
1 Two variable OLS: Review & Parameter Estimation
2 Two variable OLS: BLUE property
3 Two variable OLS: Heteroscedasticity
4 Two variable OLS: Autocorrelation
5 Nature of time-series data
6 Characteristics of time-series data
7 Financial time series: Asset returns
8 Stationarity
9 Types of random walk
10 Unit root non-stationarity
11 Unit root test
12 AR process
13 MA process
14 ARMA model
15 Forecasting using ARMA
16 ARCH, GARCH models