Essay: Positive Relationship

Sample Essay

Positive relationship implies that the growth of economic should increase as the business cycle becomes more volatile (Caporale and McKiernan 1996). Black’s (1987) hypothesis for this association states that investments will be taken only if expected return compensates for taking a risk in that investment. More risk taken, more expected return which depends on covariance of its return with the market as a whole. Caporale and McKiernan find this relationship for UK post war data. In their study high frequency data let to use the GARCH-M model.

Moreover, as Bollerslev (1986) indicated ARCH and GARCH-M models has a bigger significance when using a high frequency series. Furthermore, they tested for stationary[1]. In the time series data special econometrics problems (such as heteroskedasticity, autocorrelation, and stationarity) might be obtained. Accordingly, this study will be tested for stationary. In order to test it, Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests with the major equation t = α + βt + γ*yt-1 εt will be used (Gujarati 2009). Allowing for two tests causes less inaccuracy. Same tests were done by Fountas and Karanasos in their 2004 study. Meanwhile, Caporate and McKiernan relied just on ADF test and obtained that only GDP had a stationary series.

[1] Stationarity occurs if the mean and variance of time series data changes over time – Koop G. 2008.

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