The data file arch.gdt contain monthly stock price indices return of U.S. Nasdaq (NR). The data...

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The data file arch.gdt contain monthly stock price indices return of U.S. Nasdaq (NR). The data are recorded monthly beginning in 1988:01 and ending in 2015:12. Question 1. i) (Bonus) Consider the general case of 3 models: Model 1 NR=1NRt-1 + Et Et It-1~ N(0, ht) ht= 00+0₁7-1+02€7-2 Model 2 NRt = 1NRt-1 + Et Et It-1~ N(0,ht) h = a0 +0₁²-1+ B₁h-1 Model 3 NRt = 0 + Et Et It-1~ N(0,ht) ht= a0 +0₁²-1+ B₁ht-1 Pagan and Sabau suggested regressing the squared residuals from the estimated mean equation on the fitted estimated conditionals ht = a + 3h + error where the best model is with the highest R². Conduct this exercise and show which model has the highest explanatory power. The data file arch.gdt contain monthly stock price indices return of U.S. Nasdaq (NR). The data are recorded monthly beginning in 1988:01 and ending in 2015:12. Question 1. i) (Bonus) Consider the general case of 3 models: Model 1 NR=1NRt-1 + Et Et It-1~ N(0, ht) ht= 00+0₁7-1+02€7-2 Model 2 NRt = 1NRt-1 + Et Et It-1~ N(0,ht) h = a0 +0₁²-1+ B₁h-1 Model 3 NRt = 0 + Et Et It-1~ N(0,ht) ht= a0 +0₁²-1+ B₁ht-1 Pagan and Sabau suggested regressing the squared residuals from the estimated mean equation on the fitted estimated conditionals ht = a + 3h + error where the best model is with the highest R². Conduct this exercise and show which model has the highest explanatory power.

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