What is a news impact curve? Using a spreadsheet or otherwise, construct the news impact curve for the following estimated EGARCH and GARCH models, setting the lagged conditional variance to the value...

1. What is a news impact curve? Using a spreadsheet or otherwise, construct the news impact curve for the following estimated EGARCH and GARCH models, setting the lagged conditional variance to the value of the unconditional variance (estimated from the sample rather than the mode parameter estimates) which is 0.096.

STA 2306: FINANCIAL TIME SERIES QUIZ 3 Instructions: 1. Attempt ALL questions 2. DEADLINE is on 16th March, 2021 at 11:00PM 3. You can type your work or handwrite clearly and scan PDFs ONLY, and submit via moodle – DO NOT EMAIL or WASSUP! 4. Do NOT copy! Any copying detected you both score 0 5. Quiz 3 contributes 10 MARKS towards your final FTS grade 6. Any missed Assignment, the score is 0. Question ONE (5 MARKS) Value-at-risk (VaR) and expected shortfall (ES) are two commonly used risk measures for a portfolio of financial assets. Let Rt denote the daily return on a given portfolio of assets. VaR and ES can be estimated unconditionally from the distribution of Rt, and they can be estimated conditionally from a GARCH model. Typical unconditional models include (i) historical simulation; (2) normal distribution; (3) extreme value theory (EVT). Common conditional models include (4) GARCH; (5) GARCH + EVT. Briefly explain how VaR and ES are computed using GARCH models. Question TWO (15 MARKS) a) What is a news impact curve? Using a spreadsheet or otherwise, construct the news impact curve for the following estimated EGARCH and GARCH models, setting the lagged conditional variance to the value of the unconditional variance (estimated from the sample rather than the mode parameter estimates) which is 0.096. (1) (2) b) In fact, the models in part(a) were estimated using daily foreign exchange returns. How can financial theory explain the patterns observed in the news impact curves? 2