International Finance 423
Short Paper *
Due on April 7, 2016
This assignment can be done as a group project. Groups should have no more than 3 members.
The following exercise is meant to familiarize you with some common tools used in empirical work in
International Finance, namely regression analysis, unit root tests and cointegration tests, etc.
In this exercise, you will test either the Law of One Price or the International Fisher Equation using the E-Views
software (installed in computer lab room 115) to perform a series of test on your data, run a series of
regressions and write a report of your work. Oral presentations of your work will be held on March 29th, 31st
and April 5th 2016. NOTE: As always, Attendance is required
You are required to hand in both a hard copy and an electronic (soft) copy. Please attach a cleanly formatted
readable printout of your regression outputs (unit root tests and regression analysis) along with the requested
tables to your work. To conserve paper, you should only include your constructed tables to the hard copy but
attach all relevant computer outputs to your electronic copy.
Final Project write-up is due on April 7th, 2016 with automatic extension to April 11, 2015. (Students need not
let me know if they need the automatic extension but no projects will be accepted after noon on April 11, 2016)
Instructions:
1. Links to 6 articles (3 on LOP and 3 on IFE) have been posted on the course website (on the detailed
course outline. Week 4, column 3) Choose one (or two on the same topic) and use as your
companion paper(s).
2. Using 3 pairs of countries, try to replicate the regression analysis of your companion article(s).
Make use of monthly data. You may treat the US as your home country (e.g. US-UK, US-Japan,
US-Canada) in your analysis
Data can be found on the St. Louis Fed data website (FRED). You can access the site on line and
download the relevant data into Excel or your workfile. (You are not limited to this source)
Make sure your data is comparable across countries (i.e. they should all be indexed to the same
year with the same frequency and seasonal adjustment treatment)
3. Write a report summarizing your findings following the format of your companion paper. In your
report be sure to address whether you find evidence that would suggest LOP or IFE hold. If your
chosen theory does not appear to hold, explain the possible reasons for its failure. Do you think
whether the theory holds or not depending on the particular countries or variables chosen? How
about the sample length? You can run various other regressions with different sample lengths to
see if your results are dependent on the sample lengths.
Oral Presentation
Refer to the dates reserved for project presentations. Up to 4 presentations will be given during each class
period. Each presentation will be 15 minutes, with an additional 5 min for questions. These classes may run a
little longer than the scheduled class time, so please be ready to stay a little longer.
NOTE: Attendance is required on the presentation dates.
Obviously 15 minutes will not be enough time for you to talk about everything that’s related to the
particular topic you have chosen, so it is important to pick out and present certain elements from your
research in a concise and clear manner such that the class can get a good grasp of the issues you are trying
to address. Each team member can take turns to present, or the team may choose the most well-spoken
team member to present.
I expect everyone to actively participate in the question session of the presentation. A portion of the class
participation scores will be allocated to that. This should provide incentives for you to pay attention to the
presentations and encourage you to raise insightful questions after each presentation.
Final Project Write-up (20%)
This would be an elaboration of the ideas put forth in the presentation. This is the chance to put your own
personal touches into the project! Please keep this under 20 pages (this is an upper bound! I welcome
shorter more concise papers!), double spaced,
I expect the final project write-up to be formatted like an Finance/Economics journal article The grade for the
write-up will depend on both the quality of the writing (how clear it is and how well formatted it is) as well as
the empirical work.
A Guide to Writing Regression Analysis
The purpose of this guide is to help students and tutors alike to better understand how to
write about work in Finance/Economics.
Regression analysis writing requires a careful balance between adequate explanation and concise expression.
Economics writing, in general, tends to be sparser than that of many other disciplines. However, failing to fully
explain your methodology, results, or interpretation, can prove a fatal flaw. Additionally, there are certain pieces
of information that nearly all economics papers include and several conventions of language that are common
to economics writing. This guide is designed to address each of these issues.
Structure & Content
A typical empirical economics paper contains six sections, although variation on this pattern certainly exists.
Below is an outline of a typical paper, including a description of what each section might comprise.
Abstract:
 a brief summary of what you did and your findings. No more than 250 words
Introduction
 Introduce the topic of your study; provide background information as well as context (how much
depends on the length of your paper).
 Provide the motivation for your study (why it is important, etc).
 Articulate the aim of your study; what specifically does your paper address?
 Preview your results; you might want to explicitly point out your most important result.
Literature Review
 Summarize the existing literature on your topic. Your use of direct quotations should be minimal.
 Present any economic theory that is relevant to your topic (Remember you MUST provide citations for
such information.)
 Include a brief paragraph that puts your work in the context of the literature you discuss.
Model/Methodology
 Present your research question again; note what sort of results would support your hypothesis and what
sort might contradict your hypothesis.
 Present your econometric model; show the equation in its full form. Remember that a “perfect model” is
not a realistic assumption for an undergraduate empirical economics paper; to assume such will limit
your research ability.
 Describe each variable; include the units in which it is measured. If any of your variables are unorthodox
in construction (as in the example on pages 12 and 13, which uses 7 dummy variables) explain how the
results will be interpreted.
 Acknowledge or address issues with your methodology; such issues might include collinearity or
endogeneity. For an Finance 400 paper, you may not have the skills to address such issues, but
acknowledging them will show a nuanced understanding of your research
Data
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Note: this section can be included in the Model/Methodology section of your
paper.
Present and describe your data set.. Description could include: number of observations, sources,
reliability, missing data.
Address any issues you might have with your data.
Include descriptive statistics of your data: average, standard deviation, mean, etc.
If you use any criteria to determine your dataset, describe such criteria. For example: you use
macroeconomic data and you excluded countries with very low populations.
Results and Interpretation
 Present the results of your regression analysis. Be careful not to focus only on statistical significance, the
magnitude of your coefficient as well as the economic significance of the result is also important.
 Interpret your results and their implications; relate them to the hypotheses you
discussed in the Model/Methodology section. Specifically, do your results
support or undermine your hypothesis?
 Place your findings in the context of the literature on the topic. For example, are your findings consistent
with previous literature? Or do they represent a major departure?
Conclusion
 Summarize your findings and their implications.
 Put your findings in the context of a “big picture.” Whether your finding support or undermine your
hypothesis, tell the reader why your findings are important and what they contribute to the literature.
 Although not necessary, you might include some suggestions for further
research or ways in which your work could be improved upon.
GRADING SCHEME
Students will be evaluated on the following:
1.
Standard of presentation, language, format, sectioning etc.
2.
Theoretical Foundations and General Information
i.
Clarity of problem being investigated
ii.
Student’s knowledge of pertinent literature
3.
Design and Relevance of Methodology Used
4.
Major findings from the research
5.
Clarity and justification of conclusions and recommendations
OVERALL ASSESSMENT
Area of Assessment
Clarity of problem being investigated and significance of the study
Candidate’s knowledge of pertinent literature
Suitability of methodology, validity of data, depth and results obtained from analysis
soundness of analysis and relevance and importance of findings
Presentation (language, format, standard of presentation, sectioning, and typing)
TOTAL
Maximum Marks
Obtainable
3
4
9
4
20