Financial Econometrics

Sogang University
In Choi
Spring 2010
Final Examination
Total points: 100
Instructions: (i) Consulting an A4-sized sheet of paper on which you wrote down necessary
information is allowed.
(ii) Leave quietly if you nish the exam before others.
(iii) Answers without explanations will have zero points.
1. (10 points) What is the main motivation for considering the ARCH and GARCH
models for nancial return data.
2. (10 points) Suppose that f:
t
g are an independent sequence of returns with a zero mean.
Show that f:
2
t
g are uncorrelated over time.
3. (10 points) Explain why the impact of past squared shocks j
ti
= c
2
ti
o
2
ti
(i 0)
on c
2
t
is persistent when c
t
is generated by the IGARCH(1,1) model
c
t
= o
t
c
t
.
o
2
t
= c
o
+ ,
1
o
2
t1
+ (1 ,
1
)c
2
t1
. 0 < ,
1
< 1.
4. (10 points) Consider the model
c
t
= o
t
c
t
. o
2
t
= c
o
+ c
1
c
2
t1
.
where fc
t
g is a sequence of iid r.v. with mean 0 and variance 1, c
0
0 and c
1
0. Show
that fc
t
g are uncorrelated over time.
5. (10 points) Consider the GARCH model
c
t
= o
t
c
t
.
o
2
t
= c
o
+ c
1
c
2
t1
+ ... + c
m
c
2
tm
+ ,
1
o
2
t1
+ ... + ,
s
o
2
ts
.
where c
0
0. c
i
0. ,
j
0. and
P
max(m;s)
i=1
(c
i
+ ,
i
) < 1. Rewrite this model as an
ARMA model and discuss how we can select the orders : and :.
6. (10 points) Suppose that f:
t
g follow the ARCH(1)-M model
:
t
= co
2
t
+ c
t
.
c
t
= o
t
c
t
.
o
2
t
= c
o
+ c
1
c
2
t1
.
where fc
t
g is a sequence of iid r.v. with mean 0 and variance 1, c
0
0 and c
1
0. Are
f:
t
g serially correlated?
7. (20 points) Using daily log returns of IBM stock from July 3, 1962 to December 31,
1998 (sample size is 9190), we tted the following model
o
2
t
= 0.97o
2
t1
+ 0.03:
2
t1
.
It is known that :
9190
= 0.02 and ^ o
2
9190
= 0.01.
(a) Derive the 1-step ahead volatility forecast.
(b) Derive the 1-day horizon 5% VaR of a long position of $10 million.
8. (10 points) Consider the bivariate VAR system

r
1t
r
2t

0.5 0.0
0.0 0.1

r
1(t1)
r
2(t1)

c
1t
c
2t

.
where

c
1t
c
2t

is a vector white noise process. Does r

2t
Granger-cause r
1t
?
9. (10 points) Explain why the concept of cointegration is related to that of statistical
equilibrium.
2