Essay on 2431 Assignment2

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Pages: 32

BEO2431 Risk Management Models ~ Semester 2, 2014
Assignment 2

Task 1

For each stock price compute and plot the return (RT) as:

RT = ((Pt – Pt-1)/P t-1)

Stock Prices (Weekly Data: 02/01/2006 to 30/06/2014):

ASX200 = ASX200 Index
WBC = Westpac
ANZ = ANZ Bank
BHP = BHP Billiton
WOW = Woolworths
TLS =Telstra

1. Comment on the volatility and volatility clustering of the returns

1) The Plot of ASX200 Return in Australia Share Market

The ASX200 Return diagram demonstrates the share return from 2nd Jan 2006 to 30th Jun 2014. It shows high volatilities between Aug 2007 to Jun 2010 and Jul 2011 to Jan 2012, the returns of US dollar, and this turbulence in Australia stock market may cause by bad economic news and unstable economic
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Also a huge market crashes happened on 2nd August 2010 (-0.11).

Due to a good economic environment and stable global share market, the low volatility appeared once in a short period, which was except the period during Jan-2006 to Aug 2011 and Aug 2012 to Jun 2013.

Generally, TLS’s share price was not stable and even the market is stable, this company’s share rate of return still floated widely. Investors may not choose to invest in this company’s shares.

2. Check whether the share prices satisfy weak-form efficiency? For each stock, compute ut where ut= pt –pt-1 and test to see if ut display any patterns of autocorrelation and comment on the results.

Forms of Market Efficiency
1.Weak –Form Efficiency: Information contained in the past series of prices of a security is reflected in the current market price
2. Semi-Strong –Form: All publically available information is reflected in the security’s current market price.
3. Strong-Form Efficiency: All information, whether public or private is reflected in the security’s current market price
Weak Form
The correct implication of a weak-form efficient market hypothesis is that the past history of price information is of no value in assessing future changes in prices.
If stock prices are determined in a market that is weak-form efficient, historical price and volume data should already be reflected in current prices and should be of no value in predicting future changes.
Because price