Denote the fitted volatility by gmvol

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Again, consider the percentage daily log returns of GM stock and the S&P 500 index from 1993 to 2003 as before, but we shall investigate whether the volatility of GM stock has any contribution in modeling the S&P 500 index volatility. Follow the steps below to perform the analysis.

(a) Fit a GARCH (1, 1) model with generalized error distribution to the percentage log returns of GM stock. Denote the fitted volatility by gmvol. Build an adequate GARCH model plus gmvol as the exogenous variable for the log S&P return series. Write down the fitted model.

(b) Is the volatility of GM stock returns helpful in modeling the volatility of the S&P index returns? Why?

Reference no: EM131224759

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