Coursework Briefing 2022/23
(group, written)
Coursework information
Course Co-ordinator to complete all details below:
Course Code ECON5068
Course Title Investment, Finance and Asset Prices
Couse Coordinator Sisir Ramanan
Coursework format Group Assignment
Weighting 25%
Word limit See specific word limits on questions (+/- 10%)
Submission date 8th December 2022
Number of Student per Group (max) 3
Date Question to be posted on Moodle 14th November 2022
Question
See assessment questions in Question Paper
This assessment is group-based in order to (insert aims).
• Firstly, by working in a group and by interacting with your peers, you will enhance your
learning and your skill set. As a group, and via collective effort, you will be able to make a lot
more progress in learning about and applying economic research, compared with tackling
these questions independently.
• Second, group work provides useful experience for a career as an economist, as economists
often work in groups to solve analytical and computational problems and analyse existing
research to promote understanding of economic questions.
Arrangements for forming groups and allocating roles
Groups will be created by Programme Administrators, based on tutorial groups where possible.
Groups must discuss the Business School's Assessed Groupwork Policy and agree how they will
apply it at their first meeting. The policy can be found on the Student Information Point Moodle.
Note that the School’s Coursework Group Policy is being revised as of August 2022 and may change
slightly. We will update you when the policy is finalised.
Moodle forum
Group members must use the group forum provided to interact to ensure that no student is
disadvantaged by not having a particular social media account.
Assessment criteria
1. Answers the question/problem or topic set. [Everything written is relevant to the question;
each fact, concept, argument and piece of evidence contributes and makes a difference to the
answer]
2. Makes a convincing argument supported by appropriate evidence. [Builds a case; goes beyond
a list of facts; facts and evidence support the case being made; demonstrates evidence of
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interpretation and evaluation; argues for a position, rather than merely asserting an opinion;
anticipates and responds to possible counter-arguments; reaches concluding remarks where
applicable and assesses the strength of them.]
3. Demonstrates and applies relevant subject specific knowledge/understanding. [Answer
demonstrates understanding and application of disciplinary concepts, ideas, procedures,
illustrates application of concepts and ideas]
4. Has an appropriate structure. [Has a logical sequence, ideas relate to each other and to topic,
provides signposts for the reader (e.g. “there are three main reasons for this”, “taking a different
perspective...”, “a possible counter-argument might be...”.), conclusions drawn logically follow
from the arguments and evidence presented.
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Feedback method
Feedback on your assignment will normally be provided via Moodle. Generic (class-level) feedback
and grade profiles will normally be posted on Moodle.
Students can use academic staff office hours for additional feedback on your work.
Preparing your coursework
Document creation
Coursework
1. Please use this file naming convention: GroupNo_CourseCode_QuestionNo. e.g.
Group3_ACCFIN4099_1. If there is no question choice, use 1 as the default.
2. The file type must be .doc, .doxc, .xls, .xlsx or .pdf.
3. Include your group number in your document, ideally in the header on each page with the
course code and title, e.g. Group3_ACCFIN1003_Finance1.
4. The maximum file size limit on Moodle is 230MB
Formatting
You won’t be penalised if you don’t follow this good practice on formatting, but it will help your
markers:
• Use a Sans Serif font in black, e.g. Arial, Avant Garde, Calibri, Helvetica and Geneva.
• Use font size 12.
• Use 1.5 or double line spacing.
• Align your text to the left margin.
• Add page numbers.
Referencing and bibliography
You should reference your sources appropriately and list these in a bibliography. The bibliography is
excluded from your word limit. You should use the ‘Harvard’ referencing system, as detailed below
for written coursework.
In the text, use the following referencing conventions:
• Smith (1999) argues that…. or
• It has been argued that……. (Smith, 1999).
• If you use a direct quote, use quotation marks and cite the page number as well as the
author and date, i.e. (Smith, 1999, p. 4).
• If you have two items by the same author in the same year, refer to one as ‘a’ and the other
as ‘b’, i.e. Smith (1999a) and Smith (1999b).
For more information, please refer to the University Library webpage.
Student conduct
Plagiarism
You must adhere to the University’s rules regarding plagiarism which are based on the premise
that ‘all work submitted by students for assessment is accepted on the understanding that it is the
student's own effort’, in this case, the efforts of group members. More specifically, you must avoid
plagiarism in the following forms:
• Copying from sources without ‘formal and proper acknowledgement’
• Inappropriate collaboration – working with non-members to produce your group’s
coursework or copying work produced by another student/group
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• Submitting work which you have obtained from another source, e.g. an essay mill
• Self-plagiarism – basing coursework on work that has already been submitted for
assessment purposes.
For advice and more information, please consult:
• LEADS web pages
• University Plagiarism Statement
Turnitin
Note that your coursework will be processed through Turnitin for similarity checking. You can
submit a draft of your coursework to Turnitin before submitting your final copy. You will find
information about using Turnitin on the Student Information Point Moodle.
Submitting your coursework
A designated member of the group must submit in accordance with the stated time and date on
page 1. See below for information if you are unable to do so.
Finalising your document
Please follow the steps listed below:
1. Check spelling and grammar using the inbuilt tool on your device. You will not be penalised
for grammatical and spelling errors but we recommend that you take the opportunity to
correct them.
2. Check your file name (see above).
3. Check that you have used an accepted file type (see above).
4. Do not include any names in the file name or the document to support anonymous marking.
Uploading your document to Moodle
1. One group member will upload your document to the designated section of the Moodle
course, which will be clearly signposted.
2. Try to upload your document at least 30 minutes before the deadline (page 1) in case you
encounter any technical issues. You will be able to resubmit the document as often as you
like until the submission deadline.
3. Complete the Declaration of Originality (see below) on behalf of the group.
Declaration of Originality
When you upload your coursework on Moodle, you will be required to select a checkbox to confirm
that you agree with the University’s Declaration of Originality which applies to all academic work, as
follows:
I confirm that this assignment is my own work and I have:
• Read and understood the guidance on plagiarism provided on the Student Information Point
Moodle course including the University of Glasgow Statement on Plagiarism.
• Clearly referenced, in both the text and the bibliography or references, all sources used in
the work.
• Fully referenced (including page numbers) and used inverted commas for all text quoted
from books, journals, web etc.
• Provided the sources for all tables, figures, data etc. that are not my own work.
• Not made use of the work of any other student(s) past or present without
acknowledgement. This includes any of my own work, that has previously, or concurrently,
been submitted for assessment, either at this or any other institution, including school.
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• Not sought or used the services of any professional agencies to produce this work.
• In addition, I understand that any false claim in respect of this work will result in disciplinary
action in accordance with University regulations.
Extensions and non-submission with good cause
Please refer to the Student Information Point Moodle for relevant information.
There is no reassessment opportunity for this assignment.
Late submission penalties
In the absence of good cause, late submission penalties will be applied as explained in the Student
Information Point Moodle.
Questions
If you have any questions about this coursework briefing, please read it carefully again to ensure you
fully understand it. If you still have questions, please post these on the course Moodle Discussion
Forum.
Personal questions only can be sent to [delete as necessary]:
business-economics@glasgow.ac.uk
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Guidelines
1. You should include your Matlab code in the Appendix. The code should be commented (do
not overdo this).
2. Figures should be suitably labeled and titled. You can have them either in the main body or
in the appendix.
3. Follow standard guidelines for referencing, there should be a bibliography section listing all
the references used.
4. Mathematical equations should be properly formatted. Microsoft Word supports inserting
math symbols and equations. If you are familiar with Latex or Scientific Word, you can use
these instead.
5. Some questions have word limits, you should strictly adhere to these limits.
Read the group coursework briefing for further information.
6 Continued Overleaf
There are two questions. You must answer both questions.
1. Consider the problem of a value maximizing firm whose profit function at time t is given by
Π(Kt, At) = e
AtKθt where e is the natural exponent, At denotes the productivity level, Kt
denotes capital and θ is a parameter representing the elasticity of output with respect to capital.
Assume that there is no depreciation of capital, so the law of motion for capital is
Kt+1 = Kt + It
where It ≥ 0 is investment in capital at time t. The price of a unit of capital good is p and the
firm faces non-convex adjustment costs of capital. These costs come in two different forms:
1 The first cost is an opportunity cost of investment. The firm’s profitability falls to a λ < 1
proportion of actual profits. That is, effective profits are λpi(Kt, At) in case the firm decides
to invest in capital.
2 The second cost is a fixed cost and is given by FKt where F is the cost and Kt denotes
capital stock at time t.
These are the two costs facing the firm. Both these costs are independent of the level of invest-
ment.
The firm can choose whether to invest (I > 0) or not (I = 0), and the value function is then the
maximum of two options
V (K,A) = max{V a(K,A), V i(K,A)} ∀(K,A)
where V a(K,A) is the value function corresponding to active investment and V i(K,A) is the
value function corresponding to inactivity (no investment). Here A is the productivity level.
The productivity level for the firm is stochastic and follows an AR(1) process given by:
At+1 = ρAt + t+1, where t+1
iid∼ N(0, σ2)
7 Continued Overleaf
Based on the above information, answer the following questions:
1.1 State the dividends for the two options (active and inactive) and write down the Bellman
equation that characterizes this firm’s problem.
[10%]
1.2 Solve the Bellman equation using dynamic programming and compute firm’s optimal in-
vestment policy. You can calibrate model parameters as follows
• β = 0.95
• θ = 0.7
• p = 1.2
• λ = 0.5
• F = 0.25
• Discretize capital grid with 401 uniformly spaced points in the interval [30, 80].
• Discretize the productivity process using the Tauchen (1986) procedure so that
– A takes 3 states - {Low, Medium, High} = {AL, AM , AH}
– ρ = 0.9
– σ = 0.1
– m = 3 (± 3 st dev shocks)
• A tolerance level of 1e-7 can be used to check for convergence of the value function
iteration.
Plot value function and investment policy functions for all three productivity states. Inter-
pret these graphs.1
[30%]
1 Hint: To solve 1.2, the standard value function iteration can be applied with a small modification.
Inside the iteration loop, you will have to calculate two different value functions, one for active investment
option and the other for inactivity option. These value functions should be calculated in the standard way.
The updated value function in each iteration then is the maximum of these two at each state of the model.
8 Continued Overleaf
1.3 Consider the alternate case where the firm faces only smooth convex adjustment costs of
the form
C(It, Kt) =
γ
2
I2t
instead of the two non-convex costs. Compute value function and investment policy for the
firm in this case and explain how these policies differ relative to the non-convex cost case
in 1.2? You can calibrate the cost parameter as γ = 0.2.
[20%]
2. Based on the investment-uncertainty literature answer the following questions:
2.1 Describe four different measures of uncertainty. What are the strengths and weaknesses of
each measure (max. 600 words).
[20%]
2.2 How can uncertainty impact investment decisions of firms? Does the impact of uncertainty
on investment depend on the type of costs facing the firm? Explain. (max. 600 words)
[20%]
9 End of the Paper