ECON 3350/7350: Applied Econometrics for Macroeconomics and Finance
Tutorial 8: Volatility Models – II
1. Consider the daily share prices of Merck & Co., Inc. (MRK) for the period 2 January 2001 to 23 December 2013 in the data file Merck.csv. Let {yt} denote the time series of the share prices. Recall that we learned how to fit ARMA- ARCH/GARCH models to data last week. Now we consider extensions of these models to capture possible leverage effects and risk premia.
(a) Select and estimate a preferred ARMA(p, q)-TARCH model for the log return series rt = 100 × log(yt/yt−1). Report estimation results and test the existence of leverage effects. Write out the expression for the volatility forecast and compute the predicted volatility for the following four trading days.
(b) Repeat Part (a) but estimate a preferred ARMA(p, q)-EGARCH model.
(c) Fit a GARCH-M model to the data {rt}. Report the estimated model and test the existence of a (time-varying) risk premium. Write out the expression for the volatility forecast and compute the predicted volatility for the following four trading days.
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