Problem 1:

a. Explain the meaning of regression and its usefulness.

b. Distinguish between GARCH (1, 1) and asymmetric GARCH.

c. Clearly explain the two tests used for Cointegration?

d. Differentiate between a deterministic trend and a stochastic trend.

e. What is a Regime Switching Model?

Problem 2:

Consider the following regression result:

Y = 24.77 + 0.9415X1t - 0.0424X2t

Standard errors: (6.7525) (0.8229) (0.0807)

R-squared = 0.9635, R-bar squared = 0.9531 df =7

F-ratio = 92.40

Where Y denotes consumption, X1t denotes income and X2t denotes wealth

Required:

(a) Interpret the estimated regression results?

(b) With reference to your answer to (a), explain, with supporting reasons, the problem(s) with this regression?

(c) With reference to your answer in (b), explain  how you would  detect such a problem?