Suppose that ut follows the ARCH process, s2 t = 1.0 + 0.5u2
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Suppose that ut follows the ARCH process, s2 t = 1.0 + 0.5u2 t - 1. a. Let E(u2 t) = var(ut ) be the unconditional varia
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Suppose that ut follows the ARCH process, s2 t = 1.0 + 0.5u2 t - 1. a. Let E(u2 t) = var(ut ) be the unconditional variance of ut . Show that var(ut ) = 2. (Hint: Use the law of iterated expectations, E1u2 t 2 = E3E1u2 t ? ut - 124.) b. Suppose that the distribution of ut conditional on lagged values of ut is N(0, s2 t). If ut - 1 = 0.2, what is Pr1 -3
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