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## EVIEWS ASSIGNMENT REPORT Case Solution

EVIEWS ASSIGNMENT REPORT

ARCH MODELS (Question 3)

1) Plot the returns. What do you notice about the volatility of returns? Estimate a GARCH (1, 1) model. Are the coefficients of the correct sign?

graph

The above plotted returns show that the returns have started to deviate and become more volatile after 535 approximately.

histrogram

Since, the p value is less than 0.05, therefore, the Jarque-Bera would reject the assumption of normality which means that the data is not normal. There is the unconditional distribution of the returns.

In order to check the ARCH effect, quick estimation has been conducted. Now quick, estimate equation and: RESID01^2 C RESID01 (-1) ^2

 Dependent Variable: RESID^2 Method: Least Squares Date: 11/27/16   Time: 16:10 Sample (adjusted): 2 781 Included observations: 780 after adjustments Variable Coefficient Std. Error t-Statistic Prob. C 3.420454 0.381734 8.960305 0.0000 RESID(-1)^2 0.254778 0.034654 7.352169 0.0000 R-squared 0.064965 Mean dependent var 4.595902 Adjusted R-squared 0.063763 S.D. dependent var 10.00540 S.E. of regression 9.681160 Akaike info criterion 7.380801 Sum squared resid 72917.94 Schwarz criterion 7.392748 Log likelihood -2876.513 Hannan-Quinn criter. 7.385396 F-statistic 54.05438 Durbin-Watson stat 1.999066 Prob(F-statistic) 0.000000

The null hypothesis of the no ARCH effect has been reject because the squared residual lagged is significant Along with this, the LM test is (T-q) xR-squared = 780x0.066965 = 52.23271 which is greater than the critical value of the chi-squared distribution with 1 degrees of freedom.

Now in order to estimate the GARCH Model (1, 1); ARCH 1, GARCH 1:

write

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