ECOM5001: Econometric Theory and Application
Project Description
School of Economics, Finance and Property
Curtin University
Felix Chan
February 27, 2020
1 Introduction
This project description provides information on both Case Study and Project in
ECOM5001: Econometric Theory and Application. It aims to cover the scope and ex-
pectations of both assessments. It also contains a list of potential topics but students can
choose a topic that is not on the list with the approval of the unit coordinator. The main
objectives of the two assessments are to
1. provide students with the opportunity to formulate a set of hypotheses in business,
economics and/or finance;
2. understand the requirements to statistically verify the hypothesis using available
data;
3. obtain the ability to understand the academic literature relating to the hypotheses;
4. apply appropriate econometric techniques to verify the hypotheses;
5. understand and communicate the results and their limitations.
2 Case Study
The purpose of the Case Study is to achieve Objectives 1 - 3. The main idea is to
identify and formulate a set of hypotheses that are statistically testable and provide a
thorough literature reviews relating to the development and testing of similar hypotheses.
At the end of this research, you will be asked to provide a report on the requirements and
feasibility on statistically testing the proposed hypotheses.
The report should contain the following:
1. background of the problem;
2. the hypotheses;
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3. a literature summary on previous research relating to the problem and the proposed
hypotheses;
4. requirement to successfully test the hypotheses;
5. a feasibility summary on whether the hypotheses can be tested within the time and
resource constraints. If it is feasible, outline the process to proceed and if it is not
feasible, outline any possible adjustment to the original problem that can be made
to achieve feasibility and examine if the adjustment can still provide useful and
relevant information.
The report should not be more than 2,500 words and must be submitted electronically
via Blackboard. The due date can be found in the Unit Outline.
3 Project
The project follows from the Case Study and its purpose is to achieve Objectives 4 - 5.
You will be required to carry out the analysis as outlined in your case study. In addition
to the rigour and the accuracy of the analysis, your results must be reproducible.
The report should contain two parts. The first part is a written summary on the
problem, the hypotheses and the interpretations of the results. It should contain an
executive summary, a brief introduction to the problem, the hypotheses, the methodology
and the interpretation of the results. The second part should be in the form of either
Jupyter Notebook or RMarkdown file providing technical information on the analysis.
Your results must be reproducible via the notebooks and/or RMarkdown file.
The written report should not be more than 2,500 words. There is no page limit on
the RMarkdown and/or Jupyter notebook but please keep it concise. Code can be written
separately as a module and/or library if required. In that case, it is expected you will
also submit the source code and its documentation or provide us with the link to a code
repository, such as gitlab, where you will store your source code.
4 Topics
This section provides a list of topics that you may wish to consider.
4.1 Purchasing Power Parity
One way to think about Exchange rate determination is through the Law of One Price
(LOP) and Purchasing Power Parity (PPP). The existence of monetary union, such as
the Euro zone, make this theory more complicated to verify empirically. This project
investigates the empirical validity of purchasing power parity with Euro and examines if
interest rates do in fact have predictive power of exchange rate volatility.
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4.2 Phillip’s Curve
Starting point: Most textbooks on International Finance contains detailed explanations
of LOP and PPP, see for example Eiteman et al. (2007). They should also contain
information on journal articles that investigated this issue empirically.
4.2 Phillip’s Curve
As an economic adviser, you have been asked to investigate the relation between
inflation and unemployment empirically. A popular theory in this area is the Phillips
Curve and its variations. The empirical validity of these theories remained unresolved,
however. Your task is to provide an up-to-date empirical analysis of this theory.
Starting point: Romer (2001) is probably one of the best references. However, most
textbooks in intermediate or advanced macroeconomics would have discussion on the
Phillips Curve as well as information on its empirical evidence.
4.3 CAPM
The Capital Asset Pricing Model (CAPM) as found in Sharpe (1964) and its various
extensions, such as those proposed in Fama and French (1993), have been popular in
modelling the expected rate of return of a portfolio. However, the literature seems to
suggest that additional factors can improve the performance of these models substantially.
As an expert in machine learning, you have been asked to identify additional factors that
can improve the performance of CAPM.
Starting point: The two references, Sharpe (1964) and Fama and French (1993), are
essential. There have also been some work to extend the CAPM using LASSO type
techniques which you may also wish to consider.
4.4 Deterrent Effects of Capital Punishment
Capital punishment is an expensive expenditure in the justice system. You have been
asked to investigate the deterrent effects of capital punishment on crimes.
Starting point: This is a very broad area so it is important to break it down into multi-
ple, more focus, areas. Two good references to start are McAleer (1992) and Dezhbakhsh
et al. (2003).
4.5 Other Topics
The list above is obviously not exhaustive. Some of the other topics may include:
a. Understanding international trade using Gravity Model.
b. Foreign direct investment and corruption in developing countries.
c. Relation between market sentiment and stock prices.
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REFERENCES
d. Factors that determine federate election outcomes.
e. Factors that determine domestic airfares in Australia.
REFERENCES
Dezhbakhsh, H., P. Rubin, and J. Shepherd (2003). Does capital punishment have a
deterrent effect? new evidence from postmoratorium panel data. American Law and
Economics Review 5, 344–376.
Eiteman, D., A. Stonehill, and M. Moffett (2007). Multinational Business Finance. Pear-
son International Edition.
Fama, E. and K. French (1993). Common risk factors in the returns on stocks and bonds.
Journal of Financial Economics 33, 3–56.
McAleer, M. (1992). Modelling in econometrics: The deterrent effect of capital punish-
ment. Mathematics and Computers in Simulation 33, 519–532.
Romer, D. (2001). Advanced Macroeconomics. McGraw-Hill, Irwin.
Sharpe, W. (1964). Capital asset prices: A theory of market equilibrium under conditions
of risk. Journal of Finance 19, 425–442.
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