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Financial Econometrics Problem - GARCH Models
Volatility modeling is an integral part modern financial econometrics. This question asks you to construct a model for the volatility of S&P 100 index returns. The data consist of daily returns for January 1, 2001 until December 31, 2010.
a. Produce any graphical representations of the data that you consider useful in understanding the risk of investing in the S&P 100 index.
b. Do the daily returns for the S&P 100 index exhibit evidence of ARCH? Be sure to clearly describe any hypotheses and statistical tests that you rely on to answer this question.
c. Using the first five years of returns (Jan 2001- Dec 2005), estimate a GARCH(1,1) model assuming that the returns are conditionally normal.
d. Are the standardized returns (demeaned returns divided by their estimated standard deviations) for Jan 2001 to Dec 2005 normal? Are they more normal than the raw returns?
Be sure to clearly describe any hypotheses and statistical tests that you rely on to answer this question.
Well-detailed and explained codes with results interpretation. Be sure to clearly describe any hypotheses and statistical tests that you rely on to answer questions. Due 25 (hard copy, beginning of class).
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