SPREADSHEET ASSIGNMENT

Spreadsheet Assignment

Spreadsheet Assignment

Task 1

Evidence of stock prices exhibiting negative serial correlation has been well known for over 30 years (see for example, Fama, 1965; Cootner, 1964; French and Roll, 1986; Lo and MacKinlay, 1988 and 1990; Lehmann, 1990; Jegadeesh and Titman, 1993). When negative serial correlation is found to exist it may be possible to develop econometric models to profitably forecast future prices merely from observing historical prices. The question of whether such contrarian investment strategies have merit has fostered a somewhat controversial area of finance research. While there lives a important body of publications detailing the abnormal earnings developed from the short-term contrarian investment strategy (see for demonstration, Lehmann, 1990, Lo and MacKinlay, 1990, Jegadeesh, 1990 and Jegadeesh and Titman, 1995), there is substantial evidence that refutes the 'overreaction hypothesis' as a prime source of observed earningss. To address some of the matters surrounding the potential sources of short-term contrarian earnings, Lo and MacKinlay (1990), henceforth LM, investigating US every week supply prices, presented a decomposition method so as to determine whether the lead-lag effect or an overreaction to firm exact data was the prime source of short-term contrarian profits. Based on their research, LM concluded that a lead-lag relationship of size-sorted portfolios explained most of the contrarian profits. LM postulated that the source of shortterm contrarian profits was not a result of the overreaction hypothesis but rather was the result of a lead-lag effect on stock prices. In their findings they attributed less than 50% of the profits to overreaction and argued that a lead-lag effect generates the majority of the observed short-term contrarian profits.

Task 2

Australia also has a persistent trade deficit and its economic fortunes are particularly, though not exclusively, tied to swings in resource prices. Whereas Canadian economic cycles tend to move much in parallel with those of its neighbor the United States, Australia's booms and busts have tended to diverge quite markedly in timing, rising and falling with resource prices. Because of this close link, the value of the Australian dollar in foreign exchange markets tends to move in a wide range and is very volatile. It is one of the 10 most traded currencies in the world mainly because of its being a perceived proxy for commodities prices and also because of its role in the foreign exchange “carry trade” in which speculators move into and out of a currency to exploit differentials in ...