London School of Economics
FM 321 Classwork Lecture 3
3 Conditional volatility models: EWMA, ARCH and GARCH
Using your daily returns for JPM stock:
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1. Produce volatility forecasts using the EWMA model specification. Compare your results for two lambda parameterizations: 0.94 and 0.99.
σˆ2 =(1−λ)r2 +λσˆ2
2. Produce ARCH(1) and GARCH(1,1) volatility forecasts using the following R functions: ugarchspec, ugarchfit.
3. Compare the ARCH(1) and GARCH(1,1) models with the Likelihood Ratio test. 4. Diagnose the GARCH(1,1) model using residual analysis.
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