Question 2. The daily returns r, of a stock prices follows: r/2-1- ~ N(4,0) where o follows a GARCH (1,1) process: o = 0

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Question 2 The Daily Returns R Of A Stock Prices Follows R 2 1 N 4 0 Where O Follows A Garch 1 1 Process O 0 1 (69.62 KiB) Viewed 16 times

Question 2. The daily returns r, of a stock prices follows: r/2-1- ~ N(4,0) where o follows a GARCH (1,1) process: o = 0+ 0€, 4 + Bo Estimation of your model using historical daily returns data yields: û = 76, ô = 3, â = 0.6, ß = 0 If yesterday's returns was 92, a). generate point forecasts for each of the next 3 days' conditional variance. (9 Marks) b). calculate the 95% confidence interval for the forecast of r, for the next 2 days. (9 Marks) c). Calculate the 5% one-day-ahead Value at Risk (VaR) given that 5% Z statistics is 1.96. (7 Marks) Page 2 of 5 Question 3 A composite forecast formed from two unbiased forecasts is: Yo he = myte + (1 - obytky where 0 is the weight of each forecast: a). Derive the combined forecast errors. [5 Marks] b). Derive the variance of the combined forecast errors. [8 Marks) c). Derive the optimal combining weight 0. What happens the optimal weight if the two forecast errors are uncorrelated? [12 Marks) Question 4. You are given the following two estimated regression: