PAPER-5 APPLIED REGRESSION ANALYSIS

(Ph.D course work)

Assignment
By
Ms. Tanvi k. Tolat
Submitted
To
Dr. Aarti J. Rajyaguru
(Professor and Head of the Department )
Statistics department
VNSGU
• Generalized Gauss Markov Linear Models:-

General linear model has some assumptions and let consider linear regression model y  X   u
The assumption are as under :-
(1) Expected value of error term is zero i.e E (u )  0
(2) Error terms are not correlated with one and another and they have same variance
i.e
(3)Matrix x as k < n linearity independent column i.e  ( X )  K  n
Guass-markvov theorem state that the ordinary least squares(OLS) estimator has lowest sampling
variance within the class of linear unbiased estimators.The gauss- markov theorem tells us that if a
above condition are met, the OLS estimate for regression coefficients gives you the best linear unbiased
estimate(BLUE) possible.
But if the Error terms are correlated with one and another and they don’t have same variance i.e
E (uu ' )   2 u 

Then the OLS estimate for regression coefficients doesn't give you the best linear unbiased
estimate(BLUE) possible.
In that situation we estimate the regression coefficient by GLS method .
So as transforming the linear model equation to new model whose errors are uncorrelated and
variance are equal i.e homoscedasticy.
homoscedasticy
The Generalized GMLM (y,X,  2 ) where is known and non-singular .
y  X  u

Where E(u)=0 and v(u)=  2 

'
There exists a non-singular matrix T such that T  T  I
Consider the non-singular linear transformation as

y*  X * *  u*
Where y* =Ty
x*=Tx
u*=Tu
So that E(u*)= E(Tu)
(putting the value of u*)
= T E(u)
= T(0)
= 0
E(u*u*’)=E(T uu’T’)
=E [T (uu’)T’]
=T E( uu’)T’
=T 2 u  T’
=
2
u T T '
2
=  u In
• This implies that the transform model is fulfill the assumption of GML model since  * can be
estimated by OLS method
• So Generalized Gauss Markov Linear Msodels is
y*  X * *  u*

• ˆ *  ( X *' 1 X * ) 1 X *' 1 y *' is the BLUE of the ̂

V ( ˆ * )   2 u ( X *' 1 X * ) 1

• This method of finding BLUE of ̂ is known as aitken's generalized least squares

•  ARCH(p) model(Autoregressive conditional hetrodsacasity).
• Autoregressive conditional hetrodsacasity model is devolped by Engle in 1982 for estimation of a
hetrodsacasity conditional variance . ARCH(p) model is variance model.
• Autoregressive :- The current value can be expressed as a function of the previous value i.e they
are correlated
• Conditional:- This inform that the variance is based on past error.
• Heteroskedasticity :- This implies the series dispalys unusual variance (varying variance)
Assumption :-
This model is assume that the positive and negative shocks have the same effect on variability .
Conditions:-
This model is apply when the following conditions are satisfied:
(i) Data should be stationary
(ii) There should be volatility clustering
(iii) There should be ARCH effect
 • ARCH(p) model is linear function of square of previous error term from mean and some constant .
p is lagged value
ARCH(p) model :-
p
 t   0  1 2 t 1  .......   p 2 t  p   0    i 2 t i
2

i 1

Where  0 and  i are the parameter and both must be positive

 2 t 1 lagged square error term
 t 2 conditional variance

If the error term is high during the period (t-1), it is more likely that the value of error at the period
(t) is also higher .vice-versa

Application:-
ARCH(p) model is applied for foresting of price of stock, price of oil (financial market).
• Limitation:-
This model is capture only financial market feature like volatility clustering ,and leptokurtosis. This
model is not capture the leverage effect.
Here p+1 parameter to estimate if p is large ,accuracy of estimation is lost.

Parameter is estimated by maximum likehood method .

• GARCH (p,q) model(Generalized Autoregressive conditional hetrodsacasity).
Generalized Autoregressive conditional hetrodsacasity model is the first and basic symmetric model
developed by Bollerslev (1986).
Conditions:-
This model is apply when the following conditions are satisfied:
(i) Data should be stationary
(ii) There should be volatility clustering
(iii) There
2
should be ARCH effect
 t i

GARCH(p,q) model is defined as a linear function of past square residual and lagged conditional
variance as given below.
GARCH(p,q) model
p q
2
 t  w  1 2
t 1  .......   p 2
t p  1 2
t 1  .........   q 2
t q  w    p 2
t i    q 2 t i
i 1 i 1

2 2
where  is constant term ,  t i ARCH term(previous error term) and  t i GARCH term(previous
conditional variance)
• The general process for a GARCH (p.q) model involves three steps.
(1) The first is to estimate a best fitting autoregressive model.
(2) The second is to compute autocorrelation of the error term.
(3) In this step is to test for significance.
The parameters are estimated by maximum likehood method.
Application :-
GARCH (p.q) model is applicable in financial market (predication of share price)
Limitation :-
ARCH (p) and GARCH (p.q) models are symmetric model i.e. one of the assumption of that model
is that there is same effect of positive and negative news on volatility.
• TGARCH model (threshold GARCH model)
• One of the assumption of symmetric model (ARCH and GARCH model) is frequently violated, in
particular by stock return, in that volatility increase more after bad news than after good
news .This so called leverage effects appears firstly in Black in 1976.
• The Threshold GARCH model was introduced by the works of Zakoian(1990) and
Glosten ,Jagannathan and Runkle(1993).
• The main target of TGARCH model is to capture Asymmetrics in the term of negative and positive
shocks.
• The conditional variance for a TGARCH (1,1) model is stated as:
 2 t   0  1 2 t 1  1 2 t 1  1 2 t 1d t 1
Where dt-1 takes the value of 1(bad news) for <0 and 0 otherwise.so good news and dad news have
a different impact. Good news (positive shocks) has an impact of b1 while bad news (negative
shocks) has impact of b1+
•  is known as the asymmetry or leverage term .  >=0 asymmetry , while = 0 =symmetry. If
is significant and positive ,negative shocks will have larger effect on than positive shocks .