Let Yt be a stock’s return in time period t and let Xt be the inflation rate during this time period. Assume the model Here the t are independent N(0, 1) random variables. Model (14.30)– XXXXXXXXXXis...

Let Yt be a stock’s return in time period t and let Xt be the inflation rate during this time period. Assume the model

Here the t are independent N(0, 1) random variables. Model (14.30)– (14.31) is called a GARCH-in-mean model or a GARCH-M model.

Assume that β0 = 0.06, β1 = 0.35, and δ = 0.22.

 (a) What is E(Yt|Xt = 0.1 and at−1 = 0.6)?

 (b) What is Var(Yt|Xt = 0.1 and at−1 = 0.6)?

 (c) Is the conditional distribution of Yt given Xt and at−1 normal? Why or why not?

 (d) Is the marginal distribution of Yt normal? Why or why not?