Question No.

02
Graphical Representation

R
.03

.02

.01

.00

-.01

-.02

-.03

-.04
250 500 750 1000 1250 1500

Interpretation:
From line graph we can clearly seen that there are periods in larger and smaller volatility in the
sample, so the possibility of ARCH effects is quite high.

Condition of Auto-regression and Variance Presence:

Table 01

Variable Coefficient Std. Error t-Statistic Prob.  

C 0.000121 0.000141 0.856933 0.3916

R(-1) -0.313727 0.023537 -13.32932 0.0000

Heteroskedasticity Test: ARCH

F-statistic 16.31501    Prob. F(1,1628) 0.0001
Obs*R-squared 16.17297    Prob. Chi-Square(1) 0.0001
Interpretation:
Table 01 shows that results are significant means auto-regression and heteroskedasticity exists,
so the presence of ARCH effects are quite high.
 (a) Estimate an GARCH (p,q) model for Exchange Rate

Tabel 02
Dependent Variable: R
GARCH = C(3) + C(4)*RESID(-1)^2 + C(5)*GARCH(-1) + C(6)*GARCH(-2) +
        C(7)*GARCH(-3)

Variable Coefficient Std. Error z-Statistic Prob.

C 7.07E-05 0.000136 0.521271 0.6022
R(-1) -0.308865 0.026593 -11.61473 0.0000

Variance Equation
C 1.90E-05 4.00E-06 4.741970 0.0000
RESID(-1)^2 0.082855 0.023773 3.485272 0.0005
RESID(-2)^2 0.124391 0.024537 5.069609 0.0000
GARCH(-1) -0.064469 0.090013 -0.716220 0.4739

Decision: ARCH(2)

(b)Estimate an TGARCH (p,q) model

Table 03
Dependent Variable: R
GARCH = C(3) + C(4)*RESID(-1)^2 + C(5)*RESID(-1)^2*(RESID(-1)<0) +
C(6)*GARCH(-1)
Variable Coefficient Std. Error z-Statistic Prob.
C -0.000115 0.000148 -0.775071 0.4383
R(-1) -0.328925 0.027217 -12.08546 0.0000
Variance Equation
C 1.04E-05 3.18E-06 3.284779 0.0010
RESID(-1)^2 -0.012652 0.019704 -0.642100 0.5208
RESID(-1)^2*(RESID(-1)<0) 0.180989 0.042678 4.240810 0.0000
GARCH(-1) 0.597973 0.111500 5.363003 0.0000
Interpretation:
Table 03 shows that p-value of RESID(-1)^2*(RESID(-1)<0) is significant which means
there is asymmetric behavior in bad and good news on market. The positive value of
coefficient shows that bad news have greater effect than good news by 18%.
 (c) Estimate an GARCH (p,q) Model and Explain impact of Current Government

Table 04
Dependent Variable: R
GARCH = C(3) + C(4)*RESID(-1)^2 + C(5)*GARCH(-1) + C(6)*D01
Variable Coefficient Std. Error z-Statistic Prob.  

C 0.000120 0.000133 0.902298 0.3669

R(-1) -0.325503 0.028525 -11.41115 0.0000
Variance Equation
C 1.55E-05 4.21E-06 3.684403 0.0002
RESID(-1)^2 0.113152 0.025966 4.357703 0.0000
GARCH(-1) 0.441374 0.127444 3.463276 0.0005
Current Govt. -4.50E-06 1.78E-06 -2.526258 0.0115
Interpretation:
In table 04 the p-value of dummy is significant that shows asymmetric behavior in the
regimes of current government and other regimes. The negative value of coefficient shows
that current regime is less volatile than other regimes.
(d)Estimate an EGARCH (p,q) Model

Table 05
Dependent Variable: R
LOG(GARCH) = C(3) + C(4)*ABS(RESID(-1)/@SQRT(GARCH(-1))) + C(5)
*RESID(-1)/@SQRT(GARCH(-1)) + C(6)*LOG(GARCH(-1))
Variable Coefficient Std. Error z-Statistic Prob.  
C -0.000143 0.000148 -0.961238 0.3364
R(-1) -0.325404 0.027601 -11.78954 0.0000
Variance Equation
C(3) -2.682104 0.754743 -3.553664 0.0004
C(4) 0.164804 0.035202 4.681642 0.0000
C(5) -0.122607 0.024696 -4.964689 0.0000
C(6) 0.753265 0.071783 10.49362 0.0000
Interpretation:
Table 05 shows that the P-vlaue of C(3) intercept of variance equation is significant means there are
many other factors which effect today’s market volatility and should be the part of equatoin to make
the intercept constant. C(4) is size effect and significant p-value value with positive coefficient shows
that greater news have more effect on market volatility than small news. C(5) is sign effect and
significant p-value value with negative coefficient shows that bad news have more effect on market
volatility than good news. C(6) tells about the persistence of last day’s volatilty. Significant p-value
value with positive coefficient shows that 75% of last day’s volatility transfered to next days
volatility.