Explain arch and garch, You are working in a financial

Explain arch and garch

Reference no: EM131444027

Question: You are working in a financial institution and your boss proposes to upgrade the financial risk-management methodology the company uses. In particular, to model the FTSE-100 index your boss suggests estimation using an ARCH(1) process. You disagree and wish to convince your boss that a GARCH(1,1) process is better.

(a) Explain, intuitively first, why a GARCH(1,1) process will fit the returns of FTSE-100 better than an ARCH(1) process.

(b) Prove your point with the use of mathematics.

(c) Estimate both models and try to analyse them in such a way that you can convince your boss about the preferability of the model you are proposing. Check the conditional standard deviation and conditional variance series as well.

Reference no: EM131444027

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