This essay focuses on the empirical links between the Australian All Ordinaries Index. The file allord.wf1  has data on the daily returns (in percentage points) on these three financial indicators. You are to estimate an ARDL(P,Q) model for Australian returns.

the empirical links between the Australian All Ordinaries Index

A domestic financial firm has hired you to study the empirical links between the Australian All Ordinaries Index, the Hong Kong based Hang Seng, and the US Dow Jones Industrial Average. The file allord.wf1  has data on the daily returns (in percentage points) on these three financial indicators. You are to estimate an ARDL(P,Q) model for Australian returns

1.Firstly, Select the appropriate lag structures to ensure that your model (i) has desirable goodness of fit properties, and (ii) is free of autocorrelation.   Give your estimated equation and provide appropriate supporting outputs to demonstrate the quality of your model.
2.Secondly, Write a paragraph explaining on how you settled on your specification in the previous question. Why is it better than other possible specifications?

3.Thirdly, Write a couple of paragraphs explaining the dynamics of returns as estimated by your model. Which foreign index seems more important for returns in Australia? How long does it take for movements in these markets to impact upon the Australian index? How well does your model fit the data, and what does this imply about financial modelling?