Question: A5. The ARCH model in finance. a) Explain what features of financial data can be modelled using the ARCH model. [6 marks] b) The

A5. The ARCH model in finance. a) Explain what features of financial

A5. The ARCH model in finance. a) Explain what features of financial data can be modelled using the ARCH model. [6 marks] b) The output from Stata below summarises the estimated ARCH model for a variable y, from a sample of 760 observations. Does the output support the use of the ARCH model? Perform the relevant hypothesis test to support your answer. [7 marks] archy, arch (1) Sample: 1 760 Distribution: Gaussian Log likelihood - 949.3048 y ARCH cons Coef. --0141380 OPG Std. Err. 0214560 arch I L1. I 5319312 cons I .0030658 0001852 Yt 2 -0.66 Number of obs Wald chi2 (-) Prob > ch12 P>|z| 0.510 0512755 10.37 0.000 16.55 0.000 1958 Conf. Interval] -.05619 4314331 760 -0027027 027915 .6324293 0034289 c) How many equations does the ARCH model estimate? Outline the estimated model in equation form. [6 marks] d) The table below provides the last four observations in the sample. Using the suitable observations, forecast both y, and of in period t=761 based on the ARCH model in b). [6 marks] t=757 t=758 t=759 t=760 -0.808 0.304 -0.336 -0.784

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