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Question: question3 a monthly returns for the us stock market from...

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Question3 a) Monthly returns for the US stock market from February 1990 to December 2015 are plotted in Figure 2. .2 .1 .0 .1 .2 1990 1995 2000 2005 2010 2015 Figure 2. The US stock returns, 1990-2015 Carefully comment on the characteristics of the US stock returns data (301 b) In order to test for the ARCH effect in the data the Lagrange multiplier (LM) test is often used. Carefully explain the null and the altenative hypotheses of the LM test. 130 5

c) Consider the following estimates of two different GARCH(1,1) models: Model 1 r,#0.018 h, =0.008+0.293 e 4015 2.1+0.915 h 1.619 ,-1 Model 2 ,-0.008 h,-0.004+0.193 e +0.795 1 5015 ( 16.96) i where t is the calculated value of the t-statistic. Are the estimated coefficients of the GARCH(1,1) models of the correct sign? Does the stationary condition hold for the two models? Explain carefully. 140]

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