INV4801 ASSIGNMENT 2 *COMPLETE ANSWERS* DUE DATE 18 AUGUST 2026 (BEST ANSWERS FOR THIS ASSIGNMENT)

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,INV4801 ASSIGNMENT 2 2026 - DUE DATE: 18 AUGUST 2026

QUESTION 1

(a) GARCH (1,1) CASE STUDY

(i) Using the re-parameterized GARCH (1,1) model, compute the conditional
variance for today. (6 Marks)

Formula

The re-parameterized GARCH (1,1) model is

Today's Conditional Variance

= γ + α(Return Shock)² + β(Previous Variance)

where

γ = 0.00010

α = –0.08

β = 0.35

Previous variance = 0.0144

Current return above expectation = 7.77%

Convert the return into decimal form:

7.77%

= 0.0777

Square the return innovation

(0.0777)²

, = 0.00603729

Now substitute into the GARCH equation.

Conditional Variance

= 0.00010 + (−0.08 × 0.00603729) + (0.35 × 0.0144)

Calculate each term separately.

α(Return Shock)²

= −0.08 × 0.00603729

= −0.00048298

β(Previous Variance)

= 0.35 × 0.0144

= 0.00504

Now compute the variance.

Conditional Variance

= 0.00010 − 0.00048298 + 0.00504

= 0.00465702

Final Answer

Today's conditional variance

= 0.004657




Explanation