Time Series Analysis Final Project: Hang Seng Index Modeling and Forecasting using R

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Time Series Analysis Final Project: Hang Seng Index Modeling and Forecasting using
I. Data chosen
The data chosen for our research are daily values of Hang Seng index in the period of time
from the 5th January 2009 till 28th May 2013.
The Hang Seng Index is a free float adjusted market capitalization weighted stock market
index in Hong Kong. It is used to record and monitor daily changes of the largest
companies of the Hong Kong stock market and is the main indicator of the overall market
performance in Hong Kong. The 48 constituent companies represent about 60% of
capitalization of the Hong Kong Stock Exchange.
During this year’s course of Time Series Analysis, textbook used in the class put a big
emphasis on financial returns and methods of modeling them. We decided to choose data
which we could later turn into daily returns as it was most likely, according to the
historical examples described in the textbook, to get simple ARMA model with significant
GARCH effect. We believe that students of financial major, who don’t specialize in
quantitative methods, should master these two concepts as they are most likely encounter
them during the everyday job.
The period of time which is taken under consideration is also not random. On one hand it
is long enough to make reasonable assumptions about the future. On the other hand, since
we omit distortions cause by global financial crisis, we omit any bias which could be
caused by the depression of the global economy.
II. Motivations
Another reason to choose the Hang Seng Index for our project was our desire to find an
appropriate data set which could compound both our background knowledge. As we come
from a financial (Kamil) and political (Luis) mayors, we found ourselves with a lot of
possibilities, being the study of the Hong Kong Markets the one which attract our attention
the most. This is because we both have a strong interest in Asia, and we believe Asia is a
key region in todays world economy and politics.
It is no secret that centers of power are moving from the traditional regions like Europe
and America. The effects of the 2007-2008 financial crisis are still palpable today, and the
world economy hasnt completely recovered. The European Union is in the middle of an
alarming sovereign debt crisis and the United States have been recovering in a slower way